Lewis Securities Inc. has decided to acquire a new market dataand quotation system for its Richmond home office. The systemreceives current market prices and other information from severalonline data services and then either displays the information on ascreen or stores it for later retrieval by the firmâs brokers. Thesystem also permits customers to call up current quotes onterminals in the lobby. The equipment costs $1,000,000 and, if itwere purchased, Lewis could obtain a term loan for the fullpurchase price at a 10% interest rate. Although the equipment has a6-year useful life, it is classified as a special-purpose computerand therefore falls into the MACRS 3-year class. If the system werepurchased, a 4-year maintenance contract could be obtained at acost of $20,000 per year, payable at the beginning of each year.The equipment would be sold after 4 years, and the best estimate ofits residual value is $200,000. However, because real-time displaysystem technology is changing rapidly, the actual residual value isuncertain. As an alternative to the borrow-and-buy plan, theequipment manufacturer informed Lewis that Consolidated Leasingwould be willing to write a 4-year guideline lease on theequipment, including maintenance, for payments of $260,000 at thebeginning of each year. Lewisâs marginal federal-plus-state taxrate is 40%. You have been asked to analyze thelease-versus-purchase decision and, in the process, to answer thefollowing questions: 5. Now assume that the equipmentâs residualvalue could be as low as $0 or as high as $400,000, but $200,000 isthe expected value. Because the residual value is riskier than theother relevant cash flows, this differential risk should beincorporated into the analysis. Describe how this could beaccomplished. (No calculations are necessary, but explain how youwould modify the analysis if calculations were required.) Whateffect would the residual valueâs increased uncertainty have onLewisâ lease-versus-purchase decision? 6. The lessee compares thepresent value of owning the equipment with the present value ofleasing it. Now put yourself in the lessorâs shoes. In a fewsentences, how should you analyze the decision to write or not towrite the lease? Using complete sentences and academic vocabulary,please answer questions 5 and 6. Please don't copy from othersources. Thank you
Lewis Securities Inc. has decided to acquire a new market dataand quotation system for its Richmond home office. The systemreceives current market prices and other information from severalonline data services and then either displays the information on ascreen or stores it for later retrieval by the firmâs brokers. Thesystem also permits customers to call up current quotes onterminals in the lobby. The equipment costs $1,000,000 and, if itwere purchased, Lewis could obtain a term loan for the fullpurchase price at a 10% interest rate. Although the equipment has a6-year useful life, it is classified as a special-purpose computerand therefore falls into the MACRS 3-year class. If the system werepurchased, a 4-year maintenance contract could be obtained at acost of $20,000 per year, payable at the beginning of each year.The equipment would be sold after 4 years, and the best estimate ofits residual value is $200,000. However, because real-time displaysystem technology is changing rapidly, the actual residual value isuncertain. As an alternative to the borrow-and-buy plan, theequipment manufacturer informed Lewis that Consolidated Leasingwould be willing to write a 4-year guideline lease on theequipment, including maintenance, for payments of $260,000 at thebeginning of each year. Lewisâs marginal federal-plus-state taxrate is 40%. You have been asked to analyze thelease-versus-purchase decision and, in the process, to answer thefollowing questions: 5. Now assume that the equipmentâs residualvalue could be as low as $0 or as high as $400,000, but $200,000 isthe expected value. Because the residual value is riskier than theother relevant cash flows, this differential risk should beincorporated into the analysis. Describe how this could beaccomplished. (No calculations are necessary, but explain how youwould modify the analysis if calculations were required.) Whateffect would the residual valueâs increased uncertainty have onLewisâ lease-versus-purchase decision? 6. The lessee compares thepresent value of owning the equipment with the present value ofleasing it. Now put yourself in the lessorâs shoes. In a fewsentences, how should you analyze the decision to write or not towrite the lease? Using complete sentences and academic vocabulary,please answer questions 5 and 6. Please don't copy from othersources. Thank you
