Assignment: Case Study - Leasing
Purpose
Under this case approach, you will demonstrate your ability to undertake a detailed analysis to evaluate the buy versus lease options for a set of forecasted future cash flows from your proposed investment project. You will also be required to calculate the weighted average cost of capital (WACC). A supplementary break-even analysis is required.
How to Proceed
Building on your analysis and proposal from Assignment 2, evaluate your investment proposal business case to determine if there is a net advantage to leasing: calculations and tables of values must be prepared in Excel with the amounts derived from actual formulas that use your variables, rounded to four (4) decimals.
1. Create a title page with your equipment Buy versus Lease proposal name and author identification.
2. Prepare a summary narrative of the proposal with detailed elements, which make up the combined initial cost under a loan-supported purchase at 7% interest versus periodic lease payments.
3. Describe the five-year economic life of the asset to explain the rationale for the uneven future cash inflows on an after tax basis Be sure to identify rationale for total cost of ownership, CCA, tax shields, working capital, and 20% residual value for arriving at the net cash flow per year.
4. Develop an incremental financing approach to calculate the WACC. You will obtain the current cost of debt from the notes to the financial statements, as per Assignment 2, for up to 60% of the financing, and utilize 6% preferred shares for the remaining 40%. The preferred shares are currently selling at par.