In some instances, a company might be able to lease assets at a cost less than the cost the firm would incur if it financed the purchase with a loan. If the equipment represented a significant addition to the lessee's assets, could this affect its overall cost of capital, and thus the capital budgeting decision that preceded the lease analysis? Might this affect capital budgeting decisions related to other assets? Explain.© BrainMass Inc. brainmass.com October 24, 2018, 7:42 pm ad1c9bdddf
The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions
Leases are contractual arrangements by which the owner of property (the "lessor") allows another person (the "lessee") to use the property for a stated period of time in exchange ...
This discusses the Impact of leasing on capital budgeting
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl has frequently run out of cash. This has necessitated late payment on certain orders, which, in turn, is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first shee needs a forecast of just how much she must borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4800 per month, and the rent is $2000 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6000--this is her target cash balance. (Disregard till cash, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, February are shown below. Purchases during November amounted to $140,000.
December $160,000 $40,000
January $40,000 $40,000
February $60,000 $40,000
a. Prepare a cash budget for December, January, and February.
December: deficit = $4,400
January deficit = $11,200
February surplus = $2,000
b. Now suppose Koehl were to start selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case?
TEXTBOOK ANSWER: $164,400
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