Consider the information presented in chapter 19. Make a case for or against the current use of lease financing in todayâ€™s economic climate. Keep in mind long term interest rates, the things we know about working capital management, a managerâ€™s need to keep WACC low, and the value of project options in making your argument. You are encouraged to use outside sources to support your contentions.
Patriot Welding is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm’s tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands?
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