Hello, i need help solving problem wo, attached is the case.
There is a possibility that Agro-Chem will move to its new production facility earlier than anticipated, and hence prior to the expiration of the lease. Thus, Audrey is considering asking Lonestar to include a cancellation clause in the lease contract. What impact would a cancellation clause have on the riskiness of the lease to Agro-Chem? How would it affect the risk to Lonestar? If you were Lonestar's leasing manager, would you change the lease terms if a cancellation clause were added? If so, what changes might be made?
A cancellation clause would lower the risk of the lease to the lessee but raise the lessor's risk.
To account for this, the lessor would increase the annual lease payment or else impose a penalty for early cancellation. A cancellation option is clearly valuable as it permits response to changing market conditions.
The solution has the details for the Agro-Chem lease case with Lonestar with a discussion on the risks associated with having a cancellation clause in the lease