Agricare Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several on-line data services, then either displays the information on a screen or stores it for later retrieval by the firm's brokers. The system also permits customers to call up current quotes on terminals in the lobby. The equipment costs GHS 1,000,000, and, if it were purchased, Agricare could obtain a term loan for the full purchase price at a 10 percent interest rate. Although the equipment has a six-year useful life, it is classified as a special-purpose computer, so it falls into a straight-line depreciation. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of GHS 20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value at that time is GHS 200,000. However, since real-time display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Agricare that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of GHS 260,000 at the beginning of each year. Agricare's marginal federal-plus-state tax rate is 40 percent. The depreciation rate of the asset is given below: You have been asked to analyze the lease-versus-purchase decision, and in the process to answer the following questions: Question 1 i. Who are the two parties to a lease transaction? ii. What are the four primary types of leases, and what are their characteristics? iii. How are leases classified for tax purposes? iv. What effect does leasing have on a firm's capital structure?
Agricare Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several on-line data services, then either displays the information on a screen or stores it for later retrieval by the firm's brokers. The system also permits customers to call up current quotes on terminals in the lobby.
The equipment costs GHS 1,000,000, and, if it were purchased, Agricare could obtain a term loan for the full purchase price at a 10 percent interest rate. Although the equipment has a six-year useful life, it is classified as a special-purpose computer, so it falls into a straight-line
As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Agricare that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of GHS 260,000 at the beginning of each year. Agricare's marginal federal-plus-state tax rate is 40 percent. The depreciation rate of the asset is given below:
You have been asked to analyze the lease-versus-purchase decision, and in the process to answer the following questions:
Question 1
i. Who are the two parties to a lease transaction?
ii. What are the four primary types of leases, and what are their characteristics?
iii. How are leases classified for tax purposes?
iv. What effect does leasing have on a firm's capital structure?
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