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%