Case 40 Primus Automation Division 2002 Leasing Opsi 4

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"Primus Automation Division, 2002" (Case 40).
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1) This is a working model. Assumptions / Inputs presented can

be changed to vary the results.
2) As long as default spreadsheet calculation is "automatic" the

impact of changing assumptions will be computed in real time.
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Copyright © 2005 by the University of Virginia Darden School Foundation.

Lessee Input Data:
1. Tax Rate 34.00%

2. Pre-tax Interest Rate 9.50%
3. Equipment Cost $ 715,000
4. Lease Payment $ 164,760
5. Guaranteed Residual Value 11.2729%
6. Cash Down Payment $ -
7. Annual Loan Term 5
Results for Lessee:
1. Loan NPV $469,273

2. Lease NPV $483,225
3. Loan IRR 6.27%
4. Lease IRR 7.19%
5. Savings $ (13,952)
Lessee Input Data:
1. Tax Rate 34.00%

Results for Lessee:
1. Loan NPV $484,546

2. Lease NPV $464,306
3. Loan IRR 8.58%
4. Lease IRR 7.19%
5. Savings $ 20,240
Lessee Input Data:
1. Tax Rate 0.00%

Results for Lessee:
1. Loan NPV 663,800

2. Lease NPV $692,730
3. Loan IRR 9.50%
4. Lease IRR 11.68%
5. Savings $ (28,930)
Lessee Input Data:
1. Tax Rate 0.00%

Results for Lessee:
1. Loan NPV $671,253

2. Lease NPV $654,834
3. Loan IRR 13.00%
4. Lease IRR 11.68%
5. Savings $ 16,419
Loan Amortization Table
Year 1 2
Beginning Balance $ 715,000 $596,713
Annual Payment $186,212 186,212 186,212
Interest Before Tax @ 9.50% 67,925 56,688
Principal Reduction 118,287 129,524
Ending Balance $596,713 $467,189
Tax Rate 34.00%
Interest After Tax $44,831 $37,414
Total Interest Paid $142,600

Total Principal Paid $715,000
143,000
16,981
159,981
Table
3 4 5
$467,189 $325,360 $170,057
186,212 186,212 186,212
44,383 30,909 16,155
141,829 155,303 170,057
$325,360 $170,057 $0
$29,293 $20,400 $10,663

Year 1 2
Annual Payment $203,285 203,285 203,285
Tax Rate 34.00%

n Table
3 4 5
$479,987 $339,100 $179,898
203,285 203,285 203,285
62,398 44,083 23,387
140,887 159,202 179,898
$339,100 $179,898 $0
$41,183 $29,095 $15,435

Year 1 2
Annual Payment $186,212 186,212 186,212
Tax Rate 0.00%

n Table
3 4 5
$467,189 $325,360 $170,057
186,212 186,212 186,212
44,383 30,909 16,155
141,829 155,303 170,057
$325,360 $170,057 $0
$44,383 $30,909 $16,155

Year 1 2
Annual Payment $203,285 203,285 203,285
Tax Rate 0.00%

n Table
3 4 5
$479,987 $339,100 $179,898
203,285 203,285 203,285
62,398 44,083 23,387
140,887 159,202 179,898
$339,100 $179,898 $0
$62,398 $44,083 $23,387

Exhibit 1
AvantJet Statement of Income
($000)
2001 2000 1999
Sales $ 576,327 $ 575,477 $ 432,522

Other income 9,985 6,976 9,677
Gross income 586,312 582,453 442,199
Cost of goods sold 425,076 423,443 325,016

Selling, general, & admin. 43,624 36,215 35,632
Research & development 13,773 12,873 9,064
Interest 84,062 87,259 27,002
Total expenses 566,535 559,790 396,714
Income before taxes 19,777 22,662 45,485

Taxes 9,690 11,105 22,288
Net income $ 10,087 $ 11,557 $ 23,197
Source: Company records.

Exhibit 2
AvantJet Balance Sheet
($000)
2001 2000
Assets
Current assets:
Cash and temporary investments $ 19,918 $ 27,263
Accounts receivable 37,791 37,307
Inventories 310,180 323,101
Prepaid expenses 13,928 13,362
Total current assets 381,817 401,033
Property, plant, and equipment:
Land 2,245 2,245
Buildings 30,654 30,229
Machinery and equipment 26,932 21,244
Furniture and fixtures 1,683 1,520
Construction in progress 1,668 885
63,182 56,123
Less accumulated depreciation 12,634 8,267
Net property, plant, and equipment 50,548 47,856
Other assets 640,369 648,339
Total assets $ 1,072,734 $ 1,097,228
Liabilities and stockholders' equity

Current liabilities:
Long-term debt $ 592 $ 563
Accounts payable 42,355 38,760
Notes payable 4,750 5,764
Accrued compensation, interest,
and other liabilities 39,627 43,855
Deposits and progress payments 146,964 160,946
Total current liabilities 234,288 249,888
Long-term notes payable to banks 646,633 671,225
Deferred income taxes 42,661 41,498
689,294 712,723
Common stockholders' equity:
Common stock 3,385 3,027
Capital in excess of par value 74,081 69,770
Retained earnings 72,017 62,156
Less common stock in treasury (331) (336)
Total stockholders' equity 149,152 134,617
Total liabilities and stockholders' equity $ 1,072,734 $ 1,097,228
Source: Company records.

Exhibit 3
Terms Under Hypothetical Buy-and-Borrow

and Leasing Strategies
Loan (“Buy-and-Borrow”)
5-year term loan
Payment in arrears
Equipment cost
Cash down payment
Loan amount
Lease
5-year net lease
Leasing option #1
Leasing option #2
Leasing option #3
Leasing option #4
Both Methods
Guaranteed residual value:
(required by Primus Equipment Finance Division)
Investment tax credit
Depreciation
-and-Borrow
es
$715,000
$0
$715,000
Annual payments
(in advance)
$155,040
$160,003
$162,350
$164,760
11.2729%
0%
5-year MACRS
Exhibit 4
Sample Calculation of the Present Value of Cash Outflows1
Tax rate: 34.00% Equipment cost: $ 715,000

Pretax interest rate: 9.50% Lease payment: $ 164,760
Interest Five-Year
Payment MACRS3 Depr.
after Principal Depr. before
Year Tax2 Payment2 Rate Tax
0
1 $44,831 $118,287 20.00% $143,000
2 $37,414 $129,524 32.00% $228,800
3 $29,293 $141,829 19.20% $137,280
4 $20,400 $155,303 11.52% $82,368
5 $10,663 $170,057 11.52% $82,368
Sum $142,600 $715,000 94.24% $673,816
NPV
1
This table illustrates the calculation of net present value (NPV) for the two methods of equipment financing: the loan fin
borrow) and the lease financing. Because these cash flows are net outflows or expenses, the alternative with the lower net
customer.
2
See “Loan Amortization Table.”
3
Modified Accelerated Cost Recovery System (MACRS).
4
The residual cash flow equals the sale proceeds less the tax expense on the gain or loss from the sale. The tax expense eq
sale proceeds and net book value of the asset (see separate calculation below).
5
Loan cash flows are the sum of after-tax interest payments, principal payments, depreciation tax shield (shown as a negati
value captured from sale of the residual asset (also negative). Loan-financing cash flows occur in arrears.
6
Lease cash flows equal the assumed lease payment less the tax shield. Lease payments are made in advance.
Memo: Calculation of Residual Value Cash Flow

Equipment cost $715,000 Calculation of Tax Expense
Residual value (%) 11.2729% Market value
Residual value proceeds $80,601 Less net book value
Less: tax expense $13,402 Gain on sale
Residual cash flow $67,199 Tax expense
Calculation of Net Book Value
Equipment cost
Depreciation before tax
Net book value
hibit 4
Present Value of Cash Outflows1
Residual
Depr. Cash Flow Loan Lease
Tax after Cash Cash
Savings Tax4 Outflow5 Outflow6
$0 $108,742
($48,620) $114,498 $108,742
($77,792) $89,146 $108,742
($46,675) $124,447 $108,742
($28,005) $147,698 $108,742
($28,005) ($67,199) $85,515 $0
($229,097) ($67,199) $561,303 $543,708
$469,273 $483,225
ods of equipment financing: the loan financing alternative (also called buy-and-
enses, the alternative with the lower net present value will be more attractive to the
r loss from the sale. The tax expense equals the tax rate times the difference between
epreciation tax shield (shown as a negative value because it reduces expenses), and
h flows occur in arrears.
ments are made in advance.
lculation of Tax Expense

$80,601
ss net book value $41,184
$39,417
$13,402
lculation of Net Book Value
uipment cost $715,000
preciation before tax $673,816
t book value $41,184
Exhibit 4

Interest Five-Year
0
1 $61,347 $110,335 20.00% $143,000
2 $51,880 $124,678 32.00% $228,800
3 $41,183 $140,887 19.20% $137,280
4 $29,095 $159,202 11.52% $82,368
5 $15,435 $179,898 11.52% $82,368
Sum $198,940 $715,000 94.24% $673,816
NPV
1
customer.
2
3
4
5
6

Less: tax expense $13,402 Gain on sale
Equipment cost
Net book value
hibit 4
Residual
Tax after Cash Cash
$0 $108,742
($48,620) $123,062 $108,742
($77,792) $98,767 $108,742
($46,675) $135,394 $108,742
($28,005) $160,292 $108,742
($28,005) ($67,199) $100,129 $0
($229,097) ($67,199) $617,643 $543,708
$484,546 $464,306

$80,601
$39,417
$13,402
Exhibit 4

Interest Five-Year
0
1 $67,925 $118,287 20.00% $143,000
2 $56,688 $129,524 32.00% $228,800
3 $44,383 $141,829 19.20% $137,280
4 $30,909 $155,303 11.52% $82,368
5 $16,155 $170,057 11.52% $82,368
Sum $216,060 $715,000 94.24% $673,816
NPV
1
customer.
2
3
4
5
6

Less: tax expense $0 Gain on sale
Equipment cost
Net book value
hibit 4
Residual
Tax after Cash Cash
$0 $164,760
$0 $186,212 $164,760
$0 $186,212 $164,760
$0 $186,212 $164,760
$0 $186,212 $164,760
$0 ($80,601) $105,611 $0
$0 ($80,601) $850,459 $823,800
$663,800 $692,730

$80,601
$39,417
$0
Exhibit 4

Interest Five-Year
0
1 $92,950 $110,335 20.00% $143,000
2 $78,606 $124,678 32.00% $228,800
3 $62,398 $140,887 19.20% $137,280
4 $44,083 $159,202 11.52% $82,368
5 $23,387 $179,898 11.52% $82,368
Sum $301,424 $715,000 94.24% $673,816
NPV
1
customer.
2
3
4
5
6

Less: tax expense $0 Gain on sale
Equipment cost
Net book value
hibit 4
Residual
Tax after Cash Cash
$0 $164,760
$0 $203,285 $164,760
$0 $203,285 $164,760
$0 $203,285 $164,760
$0 $203,285 $164,760
$0 ($80,601) $122,684 $0
$0 ($80,601) $935,823 $823,800
$671,253 $654,834

$80,601
$39,417
$0
Exhibit 5
Sample Calculation of the Internal Rate of Return1
for Lease Financing
Lease Forgone Tax Forgone Initial

Payment Savings Residual Value Purchase
after Associated with after Price
Year Tax2 Depreciation2 Tax2 Saved
0 ($108,742) $715,000
1 ($108,742) ($48,620)
2 ($108,742) ($77,792)
3 ($108,742) ($46,675)
4 ($108,742) ($28,005)
5 $0 ($28,005) ($67,199)
Sum ($543,708) ($229,097) ($67,199) $715,000
IRR
1
This table illustrates the calculation of the internal rate of return (IRR) associated with lease financing. The
IRR is the effective after-tax cost of the lease financing and is useful for comparison with the cost of
alternative forms of financing. Because this is a calculation based on costs to the customer, a lower IRR will
be more attractive to the customer.
2
See “Sample Calculation of the Present Value of Cash Outflows.”
of Return1
Lease
Payment
Less
Incremental
Cash Flow
$606,258
($157,362)
($186,534)
($155,417)
($136,747)
($95,204)
($125,005)
7.19%
ociated with lease financing. The

mparison with the cost of
to the customer, a lower IRR will
Exhibit 5
for Lease Financing

0 ($108,742) $715,000
1 ($108,742) ($48,620)
2 ($108,742) ($77,792)
3 ($108,742) ($46,675)
4 ($108,742) ($28,005)
5 $0 ($28,005) ($67,199)
Sum ($543,708) ($229,097) ($67,199) $715,000
IRR
1
2
of Return1
Lease
Payment
Less
Incremental
Cash Flow
$606,258
($157,362)
($186,534)
($155,417)
($136,747)
($95,204)
($125,005)
7.19%

Exhibit 5
for Lease Financing

0 ($164,760) $715,000
1 ($164,760) $0
2 ($164,760) $0
3 ($164,760) $0
4 ($164,760) $0
5 $0 $0 ($80,601)
Sum ($823,800) $0 ($80,601) $715,000
IRR
1
2
of Return1
Lease
Payment
Less
Incremental
Cash Flow
$550,240
($164,760)
($164,760)
($164,760)
($164,760)
($80,601)
($189,401)
11.68%

Exhibit 5
for Lease Financing

0 ($164,760) $715,000
1 ($164,760) $0
2 ($164,760) $0
3 ($164,760) $0
4 ($164,760) $0
5 $0 $0 ($80,601)
Sum ($823,800) $0 ($80,601) $715,000
IRR
1
2
of Return1
Lease
Payment
Less
Incremental
Cash Flow
$550,240
($164,760)
($164,760)
($164,760)
($164,760)
($80,601)
($189,401)
11.68%

Exhibit 6
Summary Table of the Net Present Value and Internal Rate of Return
For Four Tax and Cost-of-Capital Scenarios1
Scenario A B
Effective tax rate 34.0% 34.0%
Pretax cost of debt 9.5% 13.0%
After-tax cost of debt 6.27% 8.58%
NPV of loan (“borrow-and-buy”) $469,273 $484,546
IRR of loan (“borrow-and-buy”) 6.27% 8.58%
Leasing option #1 $155,040 $155,040
NPV of leasing option #1 $454,717 $464,306
IRR of lease 5.32% 7.19%
Lease advantage over borrowing $14,556 $20,240
Leasing option #2 $160,003 $160,003
Lease advantage over borrowing $0 $20,240
Leasing option #3 $162,350 $162,350
Lease advantage over borrowing ($6,883) $20,240
Leasing option #4 $164,760 $164,760
Lease advantage over borrowing ($13,952)
Faulhaber Gmbh
NPV of loan
NPV of lease
IRR of lease
Lease advantage over borrowing
Honshu Heavy Industries
NPV of loan
NPV of lease
IRR of lease
Lease advantage over borrowing
Calculations in shaded cells are presented in Exhibits 4 and 5.
1
Internal Rate of Return
al Scenarios1
C D
0.0% 0.0%
9.5% 13.0%
9.50% 13.00%
$663,800 $671,253
9.50% 13.00%
$155,040 155,040
692,730 654,834
11.68% 11.68%
($28,930) 16,419
$160,003 160,003
$692,730 654,834
11.68% 11.68%
($28,930) 16,419
$162,350 162,350
$692,730 654,834
11.68% 0
($28,930) $16,419
$164,760 $164,760
$692,730 $654,834
11.68% 11.68%
Tahun
Opsi
0 1 2 3
1
Buy and Borrow 715,000
Depreciation Tax Saving 48,620 77,792 46,675
Lease Payment 155,040 155,040 155,040 155,040
Tax on Lease Payment (34%) 52,714 52,714 52,714 52,714
Residual Value
Tax on Residual Value
Net Cash Flow 612,674 150,946 180,118 149,001
Penyusutan Per Tahun 715,000 715,000 715,000
Income Tax Depreciation Rate

Schedule % 20 32.00 19.20
Income Tax Depreciation 143,000 228,800 137,280
Tax (34%) 48,620 77,792 46,675
n
4 5
28,005 28,005
155,040 155,040
52,714 52,714
67,199
13,402
130,331 130,331
715,000 715,000
11.52 11.52
82,368 82,368
28,005 28,005

Case 40 Primus Automation Division 2002 Leasing Opsi 4

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Case 40 Primus Automation Division 2002 Leasing Opsi 4

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This spreadsheet supports STUDENT analysis of the case,

"Primus Automation Division, 2002" (Case 40).

1) This is a working model. Assumptions / Inputs presented can

2) As long as default spreadsheet calculation is "automatic" the

Copyright © 2005 by the University of Virginia Darden School Foundation.

1. Tax Rate 34.00%

Results for Lessee:

1. Loan NPV $469,273

1. Tax Rate 34.00%

Results for Lessee:

1. Loan NPV $484,546

1. Tax Rate 0.00%

Results for Lessee:

1. Loan NPV 663,800

1. Tax Rate 0.00%

Results for Lessee:

1. Loan NPV $671,253

Total Interest Paid $142,600

$29,293 $20,400 $10,663

Total Interest Paid $198,940

$41,183 $29,095 $15,435

Total Interest Paid $216,060

$44,383 $30,909 $16,155

Total Interest Paid $301,424

$62,398 $44,083 $23,387

Sales $ 576,327 $ 575,477 $ 432,522

Gross income 586,312 582,453 442,199

Cost of goods sold 425,076 423,443 325,016

Total expenses 566,535 559,790 396,714

Income before taxes 19,777 22,662 45,485

Net income $ 10,087 $ 11,557 $ 23,197

Source: Company records.

Liabilities and stockholders' equity

Total liabilities and stockholders' equity $ 1,072,734 $ 1,097,228

Source: Company records.

Terms Under Hypothetical Buy-and-Borrow

Tax rate: 34.00% Equipment cost: $ 715,000

Memo: Calculation of Residual Value Cash Flow

lculation of Tax Expense

Tax rate: 34.00% Equipment cost: $ 715,000

Memo: Calculation of Residual Value Cash Flow

lculation of Tax Expense

Tax rate: 0.00% Equipment cost: $ 715,000

Memo: Calculation of Residual Value Cash Flow

lculation of Tax Expense

Tax rate: 0.00% Equipment cost: $ 715,000

Memo: Calculation of Residual Value Cash Flow

lculation of Tax Expense

Lease Forgone Tax Forgone Initial

ociated with lease financing. The

Lease Forgone Tax Forgone Initial

ociated with lease financing. The

Lease Forgone Tax Forgone Initial

ociated with lease financing. The

Lease Forgone Tax Forgone Initial

ociated with lease financing. The

Penyusutan Per Tahun 715,000 715,000 715,000

Income Tax Depreciation Rate

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