Financial Management

-Case 9-
“Primus Automation Division”

Syndicate 3
Tiwi Movita 29117004
M Hayckal 29117006
M Khairian 29117094
Lazuardy K Sadewa 29117149
Riska Setiawati 29117254
Primus Automation Division
An innovative producer of world-class factory-
automation products and services, with
operations in the United States, Europe and Asia.

Primus’ product included

programmable controller, numerical
control, industrial computers,
manufacturing software, factory
automation system, and data
communication.
Asset Financing Approaches
The variety of ways a firm might acquire the use
of a Primus Automated Factory System:
1. The customer could purchase a system with
cash or with borrowed funds
2. The firm could acquire the equipment
through a conditional sale in which the title
would pass to the firm upon the receipt of
final payment.
3. The customer could lease the equipment in
one of two ways;
Via a cancelable operating lease & Via a noncancelable financial capital lease
Capital vs Operating Leases

Capital Lease Operating Lease

• The lease would be required to • The lease payments would be treated

depreciate the equipment by showing as an ordinary expense, deductable
it as an asset and a liability on its from taxable income
balance sheet • The lease property would not appear
• The lease could not deduct the lease in the lease’s balance sheet
payment from its income taxes • After the lease term, the asset would
• At the end of the lease, it retained revert to the lessor
ownership and bore risk of early
changes in the assets’ value
Primus’ Lease Proposal
• To analyze leasing scenarios,
calculating NPV and IRR of cash
flows to know of which alternative
is least costly to Avantjet.
• The lowest present value would be
the cheapest financing alternative.
• If the IRR rate were below the after-
tax cost-of-debt, leasing would be
more attractive alternative.
• Through sensitivity analysis based
on various discount rate and tax
rates might determine under what
circumstances a customer might
want to lease (Scenario A,B,C, and
D).
Primus Terms Under Hypothetical Buy-and-Borrow

Loan & Leasing Strategies

and Leasing Strategies

Loan (“Buy-and-Borrow”)
5-year term loan
Payment in arrears

Equipment cost $715,000

Cash down payment $0

Loan amount $715,000

Lease Annual payments

5-year net lease (in advance)

Leasing option #1 $155,040

Leasing option #2 $160,003

Leasing option #3 $162,350

Leasing option #4 $164,760

Both Methods

Guaranteed residual value: 11.2729%

(required by Primus Equipment Finance Division)

Investment tax credit 0%

Depreciation 5-year MACRS

 Primus
Sample Calculation of Scenario B Leasing
Option 1
Loan Amortization Table
 Primus
Sample Calculation of Scenario B Leasing
Option 1
Sample Calculation of the Present Value of Cash Outflows
 Primus
Sample Calculation of Scenario B Leasing
Option 1
Residual Value Cash Flow
 Primus
Sample Calculation of Scenario B Leasing
Option 1
The Internal Rate of Return for Lease Financing
Insert the calculation of NPV and IRR
Summary Table of the Net Present Value and Internal Rate of Return
1
For Four Tax and Cost-of-Capital Scenarios
Scenario
Effective tax rate
A
34,0%
B
34,0%
C
0,0%
D
0,0% 1. Do the calculation of NPV and IRR for all
Pretax cost of debt
After-tax cost of debt
9,5%
6,27%
13,0%
8,58%
9,5%
9,50%
13,0%
13,00%
the Primus Lease Option 1,2,3, and 4.
NPV of loan (“borrow-and-buy”) $469.273 $484.546 $663.800 $671.253
IRR of loan (“borrow-and-buy”) 6,27% 8,58% 9,50% 13,00% 2. Also the calculation of NPV and IRR for
Leasing option #1
NPV of leasing option #1
$155.040
$454.717
$155.040
$436.915
$155.040 $155.040
the Faulhaber Gambh and Honshu.
IRR of lease 5,32% 5,32%
Lease advantage over borrowing
Leasing option #2
$14.556
$160.003
$47.631
$160.003 $160.003 $160.003
3. After done with calculation scenario A,
NPV of leasing option #2 $469.273 continue to calculation NPV and IRR for
scenario B, C, and D.
IRR of lease 6,27%
Lease advantage over borrowing $0
Leasing option #3 $162.350 $162.350 $162.350 $162.350
NPV of leasing option #3 $476.156
IRR of lease 6,72%
Lease advantage over borrowing ($6.883)
Leasing option #4 $164.760 $164.760 $164.760 $164.760
NPV of leasing option #4 $483.225
IRR of lease 7,19%
Lease advantage over borrowing ($13.952)
Faulhaber Gmbh
NPV of loan
NPV of lease
IRR of lease
Lease advantage over borrowing
Honshu Heavy Industries
NPV of loan
NPV of lease
IRR of lease
Lease advantage over borrowing
Summary Table of NPV and IRR for the 4
Scenario
Scenario
Effective tax rate
A
34,0%
B
34,0%
C
0,0%
D
0,0%
1. Based on NPV and IRR result from
Pretax cost of debt
After-tax cost of debt
9,5%
6,27%
13,0%
8,58%
9,5%
9,50%
13,0%
13,00% 4 leasing option and All scenario,
NPV of loan (“borrow-and-buy”)
IRR of loan (“borrow-and-buy”)
$469.273
6,27%
$484.546
8,58%
$663.800
9,50%
$671.253
13,00%
option 1,2, and 3 are have better
Leasing option #1
NPV of leasing option #1
$155.040
$454.717
$155.040
$436.915
$155.040
$651.863
$155.040
$616.202
result than the competitors.
IRR of lease 5,32% 5,32% 8,61% 8,61%
Lease advantage over borrowing (Saving)
Leasing option #2
$14.556
$160.003
$47.631
$160.003
$11.937
$160.003
$55.051
$160.003
2. For leasing option 4, it looks the
NPV of leasing option #2
IRR of lease
$469.273
6,27%
$450.901
6,27%
$672.730
10,17%
$635.927
10,17% offering are not competitive
against competitor.
Lease advantage over borrowing (Saving) $0 $33.645 ($8.930) $35.326

Leasing option #3 $162.350 $162.350 $162.350 $162.350

NPV of leasing option #3 $476.156 457.515 682.598 645.255
IRR of lease
Lease advantage over borrowing (Saving)
6,72%
($6.883)
6,72%
$27.031
10,91%
($18.798)
10,91%
$25.998 3. In order to keep the
Leasing option #4
NPV of leasing option #4
$164.760
$483.225
$164.760
$464.306
$164.760
$692.730
$164.760
$654.834 competitiveness and have more
IRR of lease
Lease advantage over borrowing (Saving)
7,19%
($13.952)
7,19%
$20.240
11,68%
($28.930)
11,68%
$16.419 benefit for Primus, Option 3 is the
Faulhaber Gmbh
NPV of loan $484.376 $501.993 $686.679 $697.207 preferable option to choose.
NPV of lease $498.593 $479.073 $714.762 $675.660
IRR of lease 7,13% 7,13% 11,42% 11,42%
Lease advantage over borrowing (Saving) ($14.218) $22.920 ($28.082) $21.547
Honshu Heavy Industries
NPV of loan $438.036 $458.436 $624.641 $640.997
NPV of lease $478.063 $459.346 $685.330 $647.839
IRR of lease 8,64% 8,64% 13,48% 13,48%
Lease advantage over borrowing (Saving) ($40.027) ($911) ($60.689) ($6.842)
Primus
Summary Table of NPV and IRR for The Four Tax
and Cost-of-Capital Structure
NPV Leasing Option 3 Primus
Scenario Vs. All Competitor

$647.839
D $675.660
$645.255

$685.330
C $714.762
$682.598

$459.346
B $479.073 Honshu
$457.515
Faulhaber

$478.063 Primus OP.3

A $498.593
$476.156

$0 $100.000 $200.000 $300.000 $400.000 $500.000 $600.000 $700.000 $800.000

Primus
Summary Table of NPV and IRR for The Four Tax
and Cost-of-Capital Structure
IRR Leasing Option 3 Primus Vs. Competitor

Scenario
13,48%
D 11,42%
10,91%

13,48%
C 11,42%
10,91%

8,64% Honshu
B 7,13%
Faulhaber
6,72%
Primus OP.3
8,64%
A 7,13%
6,72%
 CONCLUSION
ØTo analyze those leasing option and scenario, the NPV and IRR result are the
indicators of the decision making for Primus Customers.
ØIn perspectives of customers, the lower the NPV is more preferable for the
customers since it indicate the cheapest alternatives.
ØIRR also represent the effective cost of the lease financing, the lower IRR
than after tax cost of debt.
ØLooking up these 2 indicators, Option 3 is the right option for Primus to
offering the leasing proposal to Avanjet and their future customers.