Assignment

Lease vs Buy decision Execution Brewing

General Instructions:

1. You must submit your answers in written/typed form (Word or PDF is fine) AND your analysis separately in an Excel spreadsheet. Your sheet must contain the calculations/formulae you used for the analysis.

2. To receive credit for any numerical answer you must show your work. Partial credit will be given for incorrect numerical answers due to simple errors where the work is shown; no credit will be given for numerical answers (right or wrong) not showing your work or without formulas in the Excel sheet.

3. populate the analysis spreadsheet. NOTE: Do not change the formulary in the sheet.

   1. You may make other modifications or ADD TABS as you see fit. Use good practices when presenting data.

4. Read any/all questions and instructions carefully. Take your time, and don’t make simple easy- to-avoid mistakes. For any math, please round to the nearest usable figure – remember units are whole numbers, $ are two decimals, % is one decimal, etc….

The assignment:

• Conduct the analysis for the TWO scenarios using the spreadsheet provided. [Submit Spreadsheet]

• For the TWO scenarios make separate recommendations to leadership about what we (Execution Brewing) should do based on your work. Answer the following KEY questions in your report [30 Points, 15 for each Scenario]:

  • Make a recommendation for each scenario.

  • What is the quantitative evidence that supports your recommendations/decision?

  • What is the qualitative evidence that supports your recommendation, and why?

• HINT: don’t just rely on the numbers, use your critical thinking when making these recommendations!

Considering two scenarios of lease-or-buy decision for an asset acquisition. WHERE:

t = Corporate ordinary income tax rate: 33%

tg = Tax rate applicable to gains and losses on the disposal of fixed assets: 20% K = After-tax cost of capital for the firm: 8%

r = After-tax interest rate on the firm’s borrowings: 5%

The firm is considering replacing the forklifts (5) in the warehouse with all electric, replacing gas powered units that still have useful life but have an undesirable carbon footprint.

BUY Parameters:

Asset purchase price: $192,495 Depreciation life: 7 years (straight line) Salvage value: $15,000

Book value: $CALC = (Purchase Price, minus Depreciation)

5-Year Lease Scenario:

Depreciation: $27,499 / year Operating costs: $6,000 / year Lease payment: $11,880 / year

The firm is considering acquiring the Corkford Brewing facility (building) for future expansion. The seller is willing to consider a Lease (triple net)*, with an option to buy scenario for up to 5 years. If we lease the building and do exercise the BUY option, we will have to agree to pay a 3% premium over the current market value at the time of the transaction.

BUY Parameters:

Asset purchase price: $1,300,000 Depreciation life: 39 years (straight line)

Salvage value: $1,551,466 (assumes the building will appreciate ~3.6% per year) Book value: $CALC = (Purchase Price, minus Depreciation)

5-Year Lease Scenario:

Depreciation: $33,333 / year Operating costs: $52,000 / year Lease payment: $182,000 / year

*A triple net lease (NNN) is a commercial real estate lease agreement where the tenant pays all operating expenses for the property, in addition to rent and utilities: real estate taxes, building insurance, and maintenance, etc.