Should the firm own the property

Assignment Help Financial Management

Reference no: EM132067496

The questions are based on the on the Lease versus Own and Sale/Leaseback Analysis values below Please show calculations. If the interest rate (or cost of capital or discount rate) for the firm making this decision is 10%, should the firm own the property, or should it lease the property? Why?

Sales Revenue $1,500,000

Cost of Goods Sold 50.00% of sales

Additional Overhead 200,000

Up-Front/Opening Costs 2,500,000

Lease Data:

Annual Payment 200,000

Lease Term 15 years

Operating Expenses 50.00% of payment

Tax Considerations:

Corporate tax rate 30.00%

Depreciable Life (in yrs) 32

*No value after 15 years.

Ownership Data:

Property Value Today $2,000,000

Time Since Purchase 5 years
Purchase Price 1,800,000
Building Value 1,575,000
Land Value 225,000
Resale Value year 15 3,000,000
Loan-to-Value 76.06%
Loan Amount 1,369,000
Interest rate 10.00%
Loan Term 10 years
Equity Investment 431,000

CASH FLOW FROM SALE IF OWNED & SOLD AT END OF LEASE TERM:

Resale 3,000,000

Less: Mortgage Balance 1,369,000

Before-Tax Cash Flow 1,631,000

Resale 3,000,000

Less: Adjusted Basis 800,000

Capital Gain 2,200,000

Less: Tax 660,000

Additional cash flow from owning

After-Tax Cash Flow $971,000

CASH FLOW IF SOLD TODAY:

Resale 2,000,000

Less: Mortgage Balance 1,369,000

Before-Tax Cash Flow 631,000

Resale 2,000,000

Less: Adjusted Basis 1,550,000

Capital Gain 450,000

Less: Tax 135,000

After-Tax Cash Flow $496,000

SUMMARY OF AFTER-TAX CASH FLOW DIFFERENCES OF OWN vs. LEASE:

Outlay Cash Flow Reversion

Year 0 1 to 14 15

Initial Investment -496,000

Operations 59,170

Sale 971,000

Total ($496,000) $59,170 $971,000

This is the return from owing

IRR on ATCF differences 14.10%

Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Own	0	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	1,205,170
Lease / Sale-Leaseback	496,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000
Differnce of Own vs. Lease	-496,000	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	1,030,170
IRR on Own vs. Lease	14.10%

IRR on Own vs. Lease 14.10%

Reference no: EM132067496

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