Model

Question 4

INPUT DATA: KEY OUTPUT:

General Data: Lessee:

Invoice price $3,000,000 NAL

Annual lease payment $675,000 IRR
Net revenue per procedure $10,000
Per procedure lease payment $7,000 Lessor:

For Lessee Only: Unleveraged lease:

NPV
Maintenance contract cost $100,000 IRR
Loan interest (discount) rate 9.0%
Estimated residual value $1,200,000 Leveraged lease:
Residual value discount rate 4.0% NPV
Tax rate 0.0% IRR

For Lessor Only: Per Procedure Versus Annual Lease:

(Volume = procedures annually)
Maintenance contract cost $100,000
Opportunity cost rate 8.0%
Estimated residual value $1,600,000 Per procedure lease
Residual value discount rate 0.0% Annual lease
Tax rate 40.0% Difference
Leveraged lease inputs:
Amount borrowed $1,500,000
Interest rate 7.0%

MODEL-GENERATED DATA:

MACRS Depreciation Table:

MACRS Depreciation Ending

Year Rate Basis Expense Book Value
1 0.20 $3,000,000 $600,000 $2,400,000
2 0.32 3,000,000 960,000 1,440,000
3 0.19 3,000,000 570,000 870,000
4 0.12 3,000,000 360,000 510,000
5 0.11 3,000,000 330,000 180,000
6 0.06 3,000,000 180,000 0
$3,000,000

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Lessee's Annual Analysis:

Base Discount Rate: 9.0%

Residual Value Discount Rate: 4.0%

Cost of Owning:

Year 0 Year 1 Year 2 Year 3

Equipment cost ($3,000,000)
Maintenance (100,000) ($100,000) ($100,000) ($100,000)
Maint tax savings 0 0 0 0
Depreciation shield 0 0 0
Residual value
Residual value tax

Net owning CF ($3,100,000) ($100,000) ($100,000) ($100,000)

PV cost owning: ($2,327,364)

Cost of Leasing:

Lease payment ($675,000) ($675,000) ($675,000) ($675,000)

Payment tax savings 0 0 0 0

Net leasing CF ($675,000) ($675,000) ($675,000) ($675,000)

PV cost leasing: ($2,383,624)

NAL = PV cost of leasing - PV cost of owning = ($56,259)

Net Cost of Leasing versus Owning:

Lease CF - Own CF $2,425,000 ($575,000) ($575,000) ($575,000)

Lessee's IRR = 7.0%

Lessor's Annual Analysis:

Base Discount Rate: 4.8%

Residual Value Discount Rate: 0.0%

Cash Flow Analysis:

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Year 0 Year 1 Year 2 Year 3
Equipment cost ($3,000,000)
Maintenance (100,000) ($100,000) ($100,000) ($100,000)
Maint tax savings 40,000 40,000 40,000 40,000
Depreciation shield 240,000 384,000 228,000
Lease payment 675,000 675,000 675,000 675,000
Tax on payment (270,000) (270,000) (270,000) (270,000)
Residual value
Residual value tax

Net cash flow ($2,655,000) $585,000 $729,000 $573,000

Lessor's NPV = $348,151

Lessor's IRR = 6.9%

Leveraged Lease:

Year 0 Year 1 Year 2 Year 3

Unleveraged CF ($2,655,000) $585,000 $729,000 $573,000
Unleveraged CF
Loan amount 1,500,000
Interest (105,000) (105,000) (105,000)
Int tax savings 42,000 42,000 42,000
Principal repay

Net cash flow ($1,155,000) $522,000 $666,000 $510,000

Lessor's NPV = $380,213

Lessor's IRR = 14.5%

Lease Payment Analysis Graphics Data:

(Note: This table does NOT automatically recalculate when input values are changed.)

Lessee's Lessor's Total

Lease Payment NAL NPV Value
$600,000 $0 $0 $0
$620,000 $0 $0 $0
$640,000 $0 $0 $0
$660,000 $0 $0 $0
$680,000 $0 $0 $0
$700,000 $0 $0 $0
$720,000 $0 $0 $0

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Lessee's Per Procedure Analysis:

Per Procedure Lease Annual Lease

Num Annual Annual Annual Annual
of Lease Net Annual Lease Net
Proc Payment Revenue Profit Payment Revenue
20
50
70 $490,000 $700,000 $210,000 $675,000 $700,000
80 $560,000 $800,000 $240,000 $675,000 $800,000
90 $630,000 $900,000 $270,000 $675,000 $900,000
100 $700,000 $1,000,000 $300,000 $675,000 $1,000,000
110 $770,000 $1,100,000 $330,000 $675,000 $1,100,000
120 $840,000 $1,200,000 $360,000 $675,000 $1,200,000
130 $910,000 $1,300,000 $390,000 $675,000 $1,300,000

700000

600000

500000

400000

300000

200000

100000

0
20 50 70 80 90 100 110 120 130

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($56,259)
7.0%

$348,151
6.9%

$380,213
14.5%

sus Annual Lease:

dures annually)

Profit
$300,000
325,000
($25,000)

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Year 4

$0
1,200,000
0

$1,200,000

$0

($1,200,000)

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Year 4

$144,000

1,600,000
(436,000)

$1,308,000

Year 4
$144,000 All except RV flows
1,164,000 RV flows

(105,000)
42,000
(1,500,000)

($255,000)

anged.)

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al Lease

Annual Profit
Profit Difference

$25,000 $185,000
$125,000 $115,000
$225,000 $45,000
$325,000 ($25,000)
$425,000 ($95,000)
$525,000 ($165,000)
$625,000 ($235,000)

END

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