Leasing Finance Case

1. GFE Inc. should lease the equipment from Liberty Leasing. The Net Present Value (NPV) of leasing the equipment is $(2,503,115.27) as opposed to the NPV of buying the equipment $(2,538,420.97). The leasing option formulates a higher NPV therefore it is more financially beneficial to GFE Inc. to lease the equipment rather than buy it. The Net Advantage to Leasing (NAL) the equipment is $(35,305.71). Meaning that GFE Inc. would save $35,305.71 if they leased the equipment rather than buying it. Please see attached Excel documents for GFE Inc. cash flows.

2. Although the NAL of the new lease terms is worse than both purchasing and the initial lease terms, Barry may wish to choose the new terms. Barry may choose this option because no security deposit will be required, therefore they will not have to be as careful with the way they treat the equipment. Additionally, being a two year lease rather than a four year they are not committing to renewing the lease if the equipment is not in good repair by the end of the two years or if they just find a better rate at which to lease or buy the equipment from another vendor in two years. Also, by leasing in two terms GFE Inc. avoids having to capitalize the equipment for the first term since it does not meet the requirements. Although it will be capitalized should they renew the lease after two years, GFE Inc. is at least able to keep it “off the books” for two of the four years. This is unethical however, because GFE will have every intention of renewing the lease and are merely paying off the leasing company in order to keep it off the books. In reality they are actually disguising the purchase of the asset.

3. If the lessee can purchase the equipment at the end of the lease term at a price materially less than its residual value of $480,000 a bargain purchase option is present, and the lessee may be expected to exercise it and purchase the equipment. Additionally, fair market value allows the lessee and leasing company to negotiate what the value of the equipment is at the end of the lease. If the equipment is purchased at the end of the lease at fair market value, a fixed price, or $200,000 this price would be depreciated with the same schedule as if it were purchased new with 3 years MACRS. Therefore, there would be an outflow of the determined amount at the end of the lease and then 4 years of depreciation tax savings.

4. The cancellation clause would affect the value of the lease because Jerry would be taking on more risk by allowing Barry to cancel the contract. The value of the lease would increase because Jerry would have to account for the additional risk he is taking by having a cancellation policy. Jerry could do one of two things in order to cover his risk. He could either increase the annual lease payments or charge penalties for early cancelations.

Part B: Cable Corporation

1. After