world
Problem Statement: The present equipment that the restaurant have is worn out and needs to be replaced. The owner is indecisive in choosing between leasing the equipmentn and or traditionally buying it like what his father had done before.
Areas of Consideration
One factor that the owner is considering is the bulk cost of buying the equipment, which has a salvage value of $30,000.00.
This also includes the cost of financial leasing over the equipment.
Alternative Courses of Action
To buy the equipment
To lease the equipment (WITHOUT Buying Purchase Option)
To lease the equipment (WITH Buying Purchase Option)
Recommendation
1. What are the different kinds of leases available and which one would be best suited for Paulo’s restaurant? Explain why?
2. Calculate the net advantage to leasing (NAL) the restaurant equipment. It is assumed that the old equipment has no resale value whereas the new equipment would have a salvage value of $30,000 after 5 years. The restaurant’s tax rate is estimated to be 40%.
3. What do you think typically happens to leased equipment after the term of the lease expires?
4. After doing all the calculations, Paulo realizes that he underestimated the cost savings that result from improved efficiency by $1000 per year. How should this error be handled? Is it relevant? Explain.
5. How should depreciation and taxes be accounted for in the calculations?
6. If the equipment were to be leased, would the lease payments be tax deductible? Explain.
7. If AAA Leasing Company’s tax rate is 40%, what is the minimum lease payment that it would be willing to accept? Explain.
8. What is the minimum lease payment that Paulo should be willing to pay
Areas of Consideration
One factor that the owner is considering is the bulk cost of buying the equipment, which has a salvage value of $30,000.00.
This also includes the cost of financial leasing over the equipment.
Alternative Courses of Action
To buy the equipment
To lease the equipment (WITHOUT Buying Purchase Option)
To lease the equipment (WITH Buying Purchase Option)
Recommendation
1. What are the different kinds of leases available and which one would be best suited for Paulo’s restaurant? Explain why?
2. Calculate the net advantage to leasing (NAL) the restaurant equipment. It is assumed that the old equipment has no resale value whereas the new equipment would have a salvage value of $30,000 after 5 years. The restaurant’s tax rate is estimated to be 40%.
3. What do you think typically happens to leased equipment after the term of the lease expires?
4. After doing all the calculations, Paulo realizes that he underestimated the cost savings that result from improved efficiency by $1000 per year. How should this error be handled? Is it relevant? Explain.
5. How should depreciation and taxes be accounted for in the calculations?
6. If the equipment were to be leased, would the lease payments be tax deductible? Explain.
7. If AAA Leasing Company’s tax rate is 40%, what is the minimum lease payment that it would be willing to accept? Explain.
8. What is the minimum lease payment that Paulo should be willing to pay