Corporate Finance Report: Analyzing Lease versus Purchase Decisions

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Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Author’s Note:
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1ADVANCED CORPORATE FINANCE
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
Bibliography....................................................................................................................................4
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2ADVANCED CORPORATE FINANCE
Question 1
In order to well analyze whether the project should be taken on a lease or on a purchase
consideration it is important to determine the present value of all costs and benefits that the
company would be getting in each of the analyzed case. In the case of asset purchase the
company initially would be paying around $100,000 for the machinery and the same would be
depreciated using the straight line method. The company in the case of asset purchase would be
getting a depreciation tax shield benefit that would be allowing the company to earn a cash
inflow benefit. The discount rate that has been taken into consideration for the purpose of
discounting or getting the amount of cash flows that the company would be getting in the five
year time frame. The discount rate that has been taken into consideration on a pre-tax basis
would be around 10% and the taxation effect that has been taken into consideration would be
30% which makes the post-tax basis of discount rate to be around 7%.
Depreciation tax shield would be treated as a cash inflows which would be around $6,000
for a sum of five-years. The total value that would be paid in the case of asset purchase
consideration would be around $75,398 that would be accounting for all the cash inflows and
cash outflows that would be seen in asset purchase. On the other hand, in the case of finance
lease the value that would be paid in this case on a present value basis would be around
$140,390. Thus it is recommended that the asset should be taken into a purchase consideration
rather on a finance lease because of the costs that is involved in purchase consideration is
comparatively less.
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3ADVANCED CORPORATE FINANCE
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4ADVANCED CORPORATE FINANCE
Investment Analysis (Purchase Option)
Particulars Year 0 1 2 3 4 5
Initial Investment
$
(100,000.00)
Add: Depreciation Tax
Shield
$
6,000.00
$
6,000.00
$
6,000.00
$
6,000.00
$
6,000.00
Discount Factor @ 7% 1.00 0.93 0.87 0.82 0.76 0.71
Discounted Cash Flows
$
(100,000.00)
$
5,607.48
$
5,240.63
$
4,897.79
$
4,577.37
$
4,277.92
Net Present Value (Cost)
$
(75,398.82)
Pre-Tax Cost of Debt 10%
Tax Rate 30%
Post-Tax Cost of Debt 7.00%
Investment Analysis (Lease Finance)
Particulars Year 0 1 2 3 4 5
Cash Flows
$
-
$
32,000.00
$
32,000.00
$
32,000.00
$
32,000.00
$
32,000.00
Net Present Value (Cost) ($140,390.76)
Question 2
In the context of international exchange rate, parity refers to the condition whereby the
exchange rate between the currencies of two countries make the prevailing purchasing power of
two currencies on an equal footage basis. It is important to note, that theoretically the exchange
rate could be well set at a par level or at a parity level and could then be adjusted for maintaining
the parity as per the economic conditions changes. The above parity explanation is well relevant
in the long term run.
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5ADVANCED CORPORATE FINANCE
Bibliography
Efstathiou, K. 2019. The breakdown of the covered interest rate parity condition | Bruegel.
[online] Bruegel.org. Available at: https://bruegel.org/2019/07/the-breakdown-of-the-covered-
interest-rate-parity-condition/ [Accessed 16 Dec. 2019].
Encyclopedia Britannica. 2019. Parity | economics. [online] Available at:
https://www.britannica.com/topic/parity-economics [Accessed 16 Dec. 2019].
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