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Nick mentions to James Handrix, the president of Hendrix Leasing, that although the company will need the equipment for four years, he would like a lease contract for two years instead. At the end of the two years, the lease could be renewed. Nick also would like to eliminate the security deposit, but would be willing to increase the lease payments to $1.875 million for each of the two years. When the lease is renewed in two years, Hendrix would consider the increased lease payments in the first two years when calculating the terms of the renewal. The equipment is expected to have a market value of $3.2 million in two years.
Problem 1: What is the NAL of the lease contract under these terms? Why might Nick prefer this lease? What are the potential ethical issues concerning the new lease terms?
In the leasing discussion, James informs Nick that the contract could include a purchase option for the equipment at the end of the lease. Hendrix Leasing officers three purchase options:
a. An option to purchase the equipment at the fair market value. b. An option to purchase the equipment at a fixed price. The price will be negotiated before the lease is signed. c. An option to purchase the equipment at a price of $200,000.
Problem 2: How would the inclusion of a purchase option affect the value of the lease?
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