Docstoc

Lecture 5

Document Sample
Lecture 5 Powered By Docstoc
					       Lecture 5: Leasing vs Buying


                       Topic

• Ownership and control
• How to compare the total costs of leasing vs.
  buying?
       FT - Schedule (Midterm)
Date           Coverage             Notes

Mar. 6, Mon    Slides 4&5           Don’t read chpt.26

Mar. 7, Tue    Case: HDC

Mar. 13, Mon   Case: MRC

Mar. 14, Tue   Midterm              Please send request.
               review
Mar. 20, Mon   Statistical review
               on risk and return
Mar. 21, Tue   Midterm Test         5:30 to 7:15pm, Rio
       PT – Schedule (midterm)
Date            Coverage             Notes
Mar 7, Tue      Slides 4 & 5,        Don’t read chpt.26
                case: HDC

Mar. 14, Tue    Case: MRC,
                Statistical Review
                on risk and return
Mar. 18, Sat.   Midterm Review       Time and location to be
                                     announced. Please send
                                     the request.
Mar. 21, Tue    Midterm Test         5:30 to 7:15pm, Cohen
                                     no class after the test
          Asset Ownership & Leasing

• Terminology:
   – Lessee: User of a leased asset.
   – Lessor: Owner of a leased asset.
• Who controls the unspecified use of the machine? Owners
  have control rights in unforeseeable circumstances.
• Tax Treatment
   – Lease rentals are allowable tax deduction for lessees in general.
   – The lessor can claim depreciation on the leased asset.
   – Depreciation reduces taxable income, providing an annual tax
     shield equal to depreciation * tax rate.
               Lease vs. Purchase

• From lessee’s point of view, it is simply to use the
  NPV to evaluate two options.
   – Total Cost of Leasing = PV (Rentals) - PV(Rental tax
     deductions)
   – Total Cost of Buying = Cost of Purchase -
     PV(depreciation tax shield) - PV(after tax salvage
     value)
                  An Example

• A new computer costs $300,000 (at t=0). If you
  lease, you have to pay six rentals of $65,000 each,
  payable annually in advance. The computer can be
  depreciated over 3 years on a straight line basis,
  and the disposal value is expected to be $10,000 at
  the end of the lease (t = 6). The tax rate is 30%,
  and the after-tax discount rate is 7.5%. Should
  you lease or buy?
                 PV (cost of buying)

• You pay $300,000 now;
• You enjoy the tax benefit of depreciation from year 1 to 3. The
  amount of depreciation is $100,000 per year.
                               100,000 * 30%         1
                PV (depr.)                  [1        3
                                                          ]
                                   0.075          1.075
                  $78,016
• The PV of (after-tax) salvage value:
                                  10,000 * (1  30%)
                PV ( salvage)                           $4,536
                                      (1  0.075)   6

• The total cost = 300000 – 78016 - 4536 = $217,448
                PV (cost of leasing)

• Note: the first payment occurs at t = 0.
         PV (after - tax cost of lease payments) 
                              65,000(1  30%)        1
         65,000 * (1  30%)                  [1       5
                                                          ]
                                   0.075          1.075
          45,500 184,088  $229,588


• Because the PV of the total cost of buying is
  lower, you should buy.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:0
posted:5/2/2013
language:English
pages:8