Chapter 8 Leasing
Chapter 8 Chapter 8 Leasing Leasing
Leasing Long-term lease over a term of more than five years is a method of financing property,plant and equipment. Lessee:the user of the equipment Lessor:the owner of the equipment. Lessor is either the assets'manufacturer or an independent leasing company slide 1
slide 1 Leasing Leasing Long-term lease over a term of more than five years is a method of financing property, plant and equipment. Lessee: the user of the equipment. Lessor: the owner of the equipment. Lessor is either the assets’ manufacturer or an independent leasing company
Buying versus Leasing Manufacturer Manufacturer Of Asset Of Asset Firm U Lessor Lessee 1. Uses asset . Owns asset ·Uses asset 2.Owns asset not use asset ·not own asset Equity Creditors Equity Creditors Shareholders Shareholders slide 2
slide 2 Buying versus Leasing Buying versus Leasing Manufacturer Of Asset Firm U 1. Uses asset 2. Owns asset Equity Shareholders Creditors Manufacturer Of Asset Lessor • Owns asset • not use asset Lessee • Uses asset • not own asset Equity Shareholders Creditors
Operating Lease Not fully amortized -To require the lessor to maintain and insure the leased asset -The cancellation option slide 3
slide 3 Operating Lease Operating Lease Not fully amortized To require the lessor to maintain and insure the leased asset The cancellation option
Financial Lease Not provide for maintenance or service by the lessor ■Fully amortized -The lessee usually has a right to renew the lease on expiration Can't be cancelled slide 4
slide 4 Financial Lease Financial Lease Not provide for maintenance or service by the lessor Fully amortized The lessee usually has a right to renew the lease on expiration Can’t be cancelled
Capital Lease The PV of the payments is at least 90% of the fair market value of the asset. The lease transfers ownership of the property to the lessee by the end of the term of the lease. The lease term is 75%or more of the estimated economic life of the asset. The lessee can purchase the asset at a price below fair market value at the end. slide 5
slide 5 Capital Lease Capital Lease The PV of the payments is at least 90% of the fair market value of the asset. The lease transfers ownership of the property to the lessee by the end of the term of the lease. The lease term is 75% or more of the estimated economic life of the asset. The lessee can purchase the asset at a price below fair market value at the end
Sale and Lease-Back A company sells an asset it owns to another firm and immediately lease it back. The lessee receives cash from the sale of the asset. -The lessee makes periodic lease payments,thereby retaining use of asset slide 6
slide 6 Sale and Lease Sale and Lease -Back A company sells an asset it owns to another firm and immediately lease it back. The lessee receives cash from the sale of the asset. The lessee makes periodic lease payments, thereby retaining use of asset
Leverage Lease A three-sided arrangement among the lessee,the lessor and the lenders. The lessee uses the assets and makes periodic lease payment. The lessor purchase the assets,delivers than to the lessee,and collects the lease payment. The lenders supply the remaining financing and receive interest payments from the lessor. slide 7
slide 7 Leverage Lease Leverage Lease A three-sided arrangement among the lessee, the lessor and the lenders. The lessee uses the assets and makes periodic lease payment. The lessor purchase the assets, delivers than to the lessee, and collects the lease payment. The lenders supply the remaining financing and receive interest payments from the lessor
Case IBMC makes a machine that can be purchased for $10,000.Xomox has determined that it needs a new machine,and the IBMC model will save Xomox $6,000 per year.Xomox has a corporate tax rate of 34%.The five-year straight-line depreciation is used and the machine will be worthless after 5 years. However,one leasing company also can offer the same machine to Xomox for $2,500 per year for five year. slide 8
slide 8 Case IBMC makes a machine that can be purchased for $10,000. Xomox has determined that it needs a new machine, and the IBMC model will save Xomox $6,000 per year. Xomox has a corporate tax rate of 34%. The five-year straight-line depreciation is used and the machine will be worthless after 5 years. However, one leasing company also can offer the same machine to Xomox for $2,500 per year for five year
Buy 0 1 2 3 4 5 Cost of Machine -10,000 After-tax operating saving 3,9603,9603,9603,9603,960 Depreciation Tax benefit 680 680 680 680 680 Total -10,0004,6404,640 4,6404,6404,640 slide 9
slide 9 Buy 0 1 2 3 4 5 Cost of Machine -10,000 After-tax operating saving 3,960 3,960 3,960 3,960 3,960 Depreciation Tax benefit 680 680 680 680 680 Total -10,000 4,640 4,640 4,640 4,640 4,640
