UN-3B

A 1 2 3 4 5 6 7 8 9 10 11 12 14 15 16 17 18 19 20 21 22 24

EQUIVALENT LOAN METHOD Asset cost Interest rate Lease rental payment Annual depreciation Tax rate Residual Value Lease Term (years) Year 600,000 12% 140,000 100,000 40% 150,000 6 (advance payment) 0 1 2 3 4 5 6

After-tax cash flows from leasing 13 After-tax lease rental -84,000

-84,000

-84,000

-84,000

-84,000

-84,000

-84,000

After-tax cash flows from buying the asset using bank loan Asset cost Interest Exp -43,200 -43,200 Depreciation tax shield 40,000 40,000 Residual Value Net cash from buying -3,200 -3,200

-43,200 40,000 -3,200

-43,200 40,000 -3,200

-43,200 40,000 -3,200

-643,200 40,000 90,000 -513,200

Differential cash flow: Lease saves lessor 23 Lease minus buy -84,000 NPV (Leasing) 26 NPV (Buy) 27 Decision??
25

-80,800

-80,800

-80,800

-80,800

-80,800

429,200

(397,929.15) ($351,207.32)

UN-3B

1 2 Asset cost 3 Interest rate 4 Lowest acceptable lease payment 5 Annual depreciation 6 Tax rate 7 Lease term (years) 8 9 Year 10 11 Lessor after-tax cash flows from leasing 12 After-tax lease rental 13

THE LESSOR'S PROBLEM Calculating the lowest acceptable lease rate 600,000 12% 140,000 100,000 40% 6 (advance payment) 0 1 2 3 4 5 6

14 Lessor after-tax cash flows from buying the asset 15 Asset cost 16 Depreciation tax shield 17 Net cash from buying 18 19 Lessor cash flows 20 Lease + buy 21 22 IRR of cash flow

BASIC LEVERAGED LEASE EXAMPLE Cost of asset Lease term Residual value Equity Debt Interest Annual debt payment Annual rent received Tax rate 1,000,000 15 300,000 <-- Realized year 16 200,000 800,000 <-- 15-year term loan, equal payments of interest and principal 10% 105,179 <-- =PMT(B7,B3,-B6) 110,000 40% Equity Invested Rental or salvage Principal Loan Depreciation at start of Interest payment year

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

IRR of cash flows

PLE

of interest and principal

Repayment of principal

Cash flow to equity

IRR of cash flows