The questions are based on the on the lease versus own and

Question

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%