You are on page 1of 20

PRIMUS AUTOMATION DIVISION

GROUP 4
PRIMUS AUTOMATION DIVISION BACKGROUND

• Division of a manufacturing and services firm


• Producer of factory automation products and services (programmable
controllers, numerical controls, industrial computers, manufacturing
software, factory-automation systems, data communication networks
CHANGE IN BUSINESS ENVIRONMENT

• slow economic growth


• increased competition for market share
• weakened dollar driving up exports
• industry alliances, innovation
PRIMUS’S STRATEGY IN CHANGING BUSINESS
ENVIRONMENT

• Objective - maintain leadership in market share; increase sales by 15%


a year; achieve targets for net income and working capital requirements
• Provide responsive customer service, attain strong share position in
segments with high growth rate, offering leading technology products,
stimulating demand by creating new incentives for purchasing
automation equipment
AVANTJET BACKGROUND

• Corporate jet aircraft manufacturer


• Deteriorating condition during economic recession - declining stock
price, worsening balance sheet, high debt ratio (highly leveraged), CEO
ordered moratorium on any capital expenditures that may negatively
affect income statement and balance sheet
• Required an automation system to cut costs and accelerate production
line to meet delivery requirements
WHY IS PRIMUS CONSIDERING LEASING TO
AVANTJET?

• Primus needs to increase sales by 15% per year and maintain leadership
in market share
• Ban on capital expenditure by Avantjet’s CEO and need to increase
production
ASSET FINANCING APPROACHES

• Purchase system with cash or with borrowed funds


• Conditional sale (title passes to customer upon receipt of final payment)
• Lease – capital or operating
TWO KINDS OF LEASES
Capital lease Operating Lease
• Non cancellable
• Depreciate equipment (show it as
an asset and liability on balance • Cancellable
sheet)
• Not shown on balance sheet
• No deduction of lease payment
from taxable income • Deduction of lease payment
• Ownership passed onto lessee at from taxable income
the end of lease • Ownership remains with
• Lessee bores risk of changes in lessor at the end of lease
asset value, obsolescence, etc.
PRIMUS COMPETITION
LEASING CONDITION

• 11.2729% residual guarantee and a positive NPV return to Primus


• Primus terms are competitively more advantageous as compared to its
competitors, Faulhaber Gmbh and Honshu Heavy Industries
• An operating lease will be appropriate and more acceptable to Avantjet
because of already high debt ratio and moratorium on capital
expenditures
LOAN AMORTIZATION TABLE
NPV FOR TWO METHODS OF FINANCING : LOAN & LEASE
UNDER SCENARIO A (LESSEE’S POV)
IRR FOR TWO METHODS OF FINANCING : LOAN & LEASE
UNDER SCENARIO A
LEASING OPTIONS
Multiple scenarios created
with different tax rates (0%
and 34%) and different Rd
(9.5% and 13%) due to
changing tax conditions and
greater risk with leasing high
technology equipment, with
different leasing terms
LEASE ADVANTAGE
OVER BORROWING TO
AVANTJET
• Honshu Heavy Industries
is not providing any
advantage over
borrowing and buying
and hence, is least
competitive in any
scenario
• Faulhaber is thus the
main competitor in which
case, option 1, 2 and 3
are better
NPV FOR PRIMUS UNDER OPTIONS 1 AND 2
NPV FOR PRIMUS UNDER OPTIONS 3 AND 4
CONCLUSION

• Need to offer an operating lease


• Option 1 and 2 give lower NPV as compared to the 3rd and 4th option
• Option 4 gives the highest NPV to Primus out of all four options but
Avantjet would have a greater net advantage of leasing over borrowing
from Honshu Heavy Industries so potential loss of business deal
• Hence, Primus should offer option 3
THANK YOU!