Corporate Finance Case Study
Advanced Computers has decided to proceed with the manufacture and distribution of the virtual
keyboard (VK) the company has developed. To undertake this venture, the company needs to
obtain equipment for the production of the microphone for the key board. Because of the
required sensitivity of the microphone and its small size, the company needs specialized
equipment for production.
Lucas Johnson, the company president, has found a vendor for the equipment. Memtech
Acoustical Equipment has offered to sell Advanced Computers the necessary equipment at a
price of $4.3 million. Because of the rapid development of new technology, the equipment will
be fully depreciated after four years with the straight line depreciation approach. At the end of
the fourth year, the market value of the equipment is expected to be $450,000.
Alternatively, the company can lease the equipment. Two leasing companies, Hendrix Leasing
and International Leasing Corporation, offered their leasing terms to Advanced Computers.
Hendrix proposed the following lease contract: The lease contract calls for monthly payment of
$90,000 due at the beginning of each month for four years. Additionally, Advanced Computers
must make a security deposit $200,000 at the beginning of the lease contract (i.e. at the
beginning of the first month) and the deposit will be returned when the lease expires at the end of
the last month.
International Leasing Corporation proposed the following lease contract: The lease contract calls
for monthly payment of $91,500 due at the beginning of each month for four years without
Advanced Computers can borrow a loan with the interest rate of 10% per year from a bank to
finance the equipment. The company has a marginal tax rate of 21%.
1. Use Excel to calculate the net present values (NPVs) (it is also called net advantage to
leasing (NAL)) for Advanced Computers based on the lease contracts proposed by
Hendrix Leasing and International Leasing Corporation, respectively.
2. If the before-tax cost of debt of Hendrix Leasing is 4% per year and the marginal tax rate
is 21%, what is the net present value of the leasing contract for Hendrix Leasing? Use
Excel to do calculation.
3. If the before-tax cost of debt of International Leasing is 4.5% per year and the marginal
tax rate is 21%, what is the net present value of the leasing contract for International
Leasing? Use Excel to do calculation.
4. Write up a one-page memo to summarize the issue and your quantitative analysis. Based
on your analysis, please make recommendations about whether Advanced Computers
should buy or lease the equipment. If they decide to lease the equipment, which leasing
company should they choose and why? What are benefits brought by the leasing
contracts to Hendrix Leasing and International Leasing, respectively? You are supposed
to be a financial analyst in Advanced Computers and the memo is addressed to the
president Lucas Johnson
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