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' .‘I .i '-.‘ ' III: 3711.}1'11 IIII III7—o>cw cmguwm: gases» co>m .muo: mg» :0 v_aa ummcoucw on» uu:vmv.ou vmzoppm m? can .ueouc— ma A_o>:__ cozuwm: gmaogu co>m .ouoc scam . wsoucw ummcmuc_ accuse ompo H.N ma=m_a . soaps use» Fae: :muu co moccguxm Poauua “was use .xuv__nmv_ xou ounce; gust: muscucm xoon acoezoa _ mmno_ axes on nozop—a m_ A_auaa A "muozs mmmnmw.u >az ANNNV once. Loom.sv Aoom.sv m a Amsv meow. Aamv Aamwv a ANNV scum. Ammv Ammwv m Away mmmo. Ammv Amway a Noa.~ mHHa. ova.m om~.m om Aomav «on m Ham.~ mama. osa.m oma.m om Aomav N mmm.m swam. ova.m oma.mm owe Aommv H coo.sw H coo.sm coo.sw o >az NNH Louomm mzopu cmau acmexcm .uuzcmo umou msoucH uncuxzm mapm> Fmauwmmm me> uczoumwo .ou< Page» ammo; mmu< .Loago ummcmucm a ammoamo xuwczumm ammo; mwmzpec< xohtcmpm< m.¢ spam» 59 after-tax amounts, accumulated cash flows and the discounting factors used to arrive at the net present value. 3. Cash Flows for a "Phantom Sale-Leaseback" With a "Phantom Sale-Leaseback" agreement one should recall that the user originally purchases the asset establishing his own financial terms, then, within the three-month grace period, enters into an agreement with a third party where tax benefits are exchanged for cash. Since many of the cashflows are the same as under the purchase alter- native, only an explanation of the distinct flows will proceed. The basic assumptions of this alternative are: 1) User buys property at same rates as previous purchase alter- native, but then enters into agreement with third party. 2) Third party agrees to pay user 20 percent of asset value or $2,000 for use of ACRS deductions and ITC. 3) User applies this $2,000 cash towards his 30 percent or $3,000 down payment reducing his out-of—pocket cash require- ment to $1,000. 4) Third party then issues user a note for the remaining $8,000 which will be paid back in three equal annual installments at a 16 percent interest rate. The amount of the install- ment payment is $3,562. 5) User then leases the property back on a three-year term with annual rental payments exactly equal to the install- ment payments of $3,562. Thus no actual exchange of cash takes place except for the $2,000 upfront. The remaining lease payments and installment payments are book entries only. 6) User buys asset at end of lease period for $1. The difficult problem with the "Phantom Sale-Leaseback" agreement is the detennination of after-tax rental expense and interest income (from the installment payments), which are recorded only as book entries by the user. Although these flows are never actually paid or received, 60 they still have tax consequences. For this example, the $3,562 of rental expense paid annually by the user can be written off as a busi- ness expense. Thus the tax benefit applicable to this analysis is the tax savings due to the write-off. With the 10 percent marginal tax rate, the after-tax cashflow (tax savings) from the non-cash rental expense would be $3,562 x .10 = $365.20 for each year. The same holds true for the interest earned on the installment pay- ments. The interest, although never actually received, must be recorded as interest income. Therefore, more taxes are actually paid than income earned. The relevant after-tax amount would be the before-tax interest earned times the tax rate. This represents the amount of taxes paid for income never actually received. Reference to Table 4.9 shows the calcu- lation of interest before and after taxes. Table 4.9 "Phantom Sale-Leaseback" Interest Income Before-Tax After-Tax Year Interest Interest Principal Balance 0 $8,000 1 $1,280 $128 $2,282 5,718 2 915 91 2,647 3,071 3 491 49 3,071 0 The remaining cashflows are taken directly from Table 4.4 under the purchase alternative. The only difference is the down payment amount which represents the difference between the user's down payment for the original purchase and the cash he receives from the third party for the sale of tax benefits. 61 There are three major differences with a "Phantom Sale-Leaseback" option: 1) the user exchanges ACRS deductions and ITC for cash and applies it to his down payment; 2) there are tax savings with the book entry deduction of rental expense; and 3) a tax loss occurs from the interest earned on the note from the third party. References to Tables 4.10 and 4.11 shows the before-tax and after-tax cashflows with the determination of NPV. Again, the same procedure of accumulating the annual flows, discounting them, and summing the discounted values to arrive at the NPV is followed. In this simple example, the three options are rated according to the Net Present Value method as follows: NPV 1 = "Phantom Sale-Leaseback" $7,737 2 = Purchase 9,045 3 = Two-Party Lease 9,198 It must be remembered that this is only a hypothetical example to demonstrate the proper technique for deriving the least-costly method of financing an investment. Even though the "Phantom Sale-Leaseback" appears to be least-costly given the assumptions, there may be other factors, as mentioned previously, that could prevent a firm from enter- ing into this type of agreement. Readers should use caution in evaluat- ing all alternatives. It is h0ped that this chapter can serve as a guide for the techniques involved in performing this type of analysis. 62 omH Hm Hmc Nom.m vmm mon.~ omH mam mom.m mHo.fl mom.~ 0mm» owN.Hw Nom.ma oo¢.Hw mmm.~m 88.3 m a a m s m N a coo.Hw o >mz RNH Locum; mzopm smug pmou pseuxzm pmmcmpcm acmm “mucous“ ngwucwca .ou< Peach .Loaao smmuucoz zmmuucoz zmmu :mmo szuwmwm me> w acmexma czoo =xumammmmptmpmm soucmnm= mwmxpoc< xmhtmcoemm o~.e mFth 63 .Nmmqu u >az AHNHV mmos. HoON.HV Hoom.Hv N H a H 4 mHN.N NHHN. NHH.N omH HH as HQHNHV mas maN.N N HH¢.N NNNH. .HoH.N omH Hm HamNHv 4H5 mom.N N NNN.N mNmN. moH.N omHH . NNHH HomNHV oaN.HH NNm.HH H coo.HH H coo.HH coo.HH o >az NNH mzopu gmmu Hmou paoixzm ummcmucH acmm ammcmucH HmawucHLa Hmzuwmmm me> Logged .uo< pouch .Loaao gmmutcoz smootcoz cmmu smug w acmEXma :zoo .xoanmmapH-pHam sapcaca. mHmHHac< xaH-LpHc< HH.s pHaaH CHAPTER V CASE STUDIES-~LEASE VERSUS PURCHASE This chapter begins with a discussion of the various assumptions made to develop the hypothetical case examples of leasing and purchase alternatives. Most of the assumptions are based on actual statistics and personal exposure to various credit institutions offering lease and/or purchase options. It would be impossible to try and develop examples to meet everyone's needs, however, it is the opinion of the author that the chosen statistics can act as a general representation, and one that will be useful as a guide to readers in evaluating the proper financing decision. Following the assumptions section are a series of figures reflect-- ing how the optimal-equivalent lease payment changes with either the altering or introduction of new variables into the analysis. This pay- ment can be thoughtof as the BREAK-EVEN amount that equates the net present value of the lease to the NPV of the buy, given certain assump- tions. A total of 288 hypothetical case examples were developed and analyzed with the use of a microcomputer and a program originally developed by Dr. Allan Rahn of Michigan State University and revised by Ms. Rosanne McGregor and the author.1 A listing of the program is 1Extension specialist; senior programmer, Agricultural Economics programming service; and graduate student, respectively, at Michigan State University. 64 65 found in the appendix as well as a complete printout of a hypothetical case example for both three-year and five-year recovery property. Little detail about the determination of these statistics will be dis- cussed in this chapter. Readers not familiar with Net Present Value techniques should refer back to Chapter IV. A. Assumptions Made for Analysis 1. Types of Property The examples are analyzed for both three-year and five-year recovery property. No specific types of assets are considered; however, for agri- culture one can think of three-year recovery property as representing: ) automobiles ) trucks under 10,000 lbs. weight ' c) hog breeding gilts ) sows and boars and five-year recovery property representing: a) heavy trucks semi-trailers other livestock breeding animals ) ) d) general farm machinery and equipment ) dairy equipment ) all single purpose agriculture and horticulture structures, such as freestall, farrowing, cattle feeding, or poultry barns 9) single purpose grain or feed storage structures such as silos h) fruit or vegetable storages and fruit processing structures 66 2. Value of Assets In this analysis the three-year recovery property is assumed to have a cost of $10,000, and the five-year recovery property a cost of $50,000. This represents the cost of purchase and the cost to the lessor. 3. Useful Life All examples of three-year recovery property assume the asset has an eight-year useful life, and examples of five-year recovery property have a 12-year useful life. The analysis assumes that all assets are main- tained throughout their useful life and sold for salvage or residual value at the end of that period. 4. Salvage or Residual Value In the first segment of the figure analysis section, the salvage or residual value is a constant 20 percent of the asset cost. Thus, three- year recovery property has a salvage value of $2,000 and five-year re- covery property $10,000. In the second segment where the desired rate of return is varied, the residual or salvage value is dropped to 10 per- cent of asset cost. 5. Additional Revenue and Eppense The assumption is made that whether the asset is leased or purchased, any additional revenue or operating expense which accrued to the business from the adoption of the asset is the same under either financing alter- native. Therefore, no revenue or expense statistics are included in the analysis. 67 6. Tax Rate Each hypothetical case example is analyzed at four distinct tax rates (0, 10, 30 and 50 percent). All cashflows with tax consequences are adjusted and put on an after-tax basis accordingly. 7. Opportunity Cost This analysis assumes that an "opportunity cost" is applied to down payments under a purchase option and security deposits with a lease. This cost represents the income foregone by tying up those funds for either the length of the finance period or lease term. This cost has no relationship to the "opportunity cost" of capital discussed in Chapter IV. This cost is not incorporated into the discount factor but is treated as a non-cash, non-taxable expense, deducted as a cash out- flow. The discount factor used in this NPV analysis represents the costs of debt and equity capital, plus relevant risks associated with the investment. B. Additional Assumptions for Purchase 1. ITC and ACRS Deductions Under each purchase example both the ITC and ACRS deductions are assumed taken by the buyer or user. With the five-year recovery property 10 percent of the asset's value, or $5,000, is taken in year 1 as a direct write-off from tax liability for ITC. The percentage and before- tax ACRS deductions are the following: 68 Table 5.1 ACRS Deductions--Five-Year Recovery Property Year Percent Deduction Before-Tax Amount 1 15 $ 7,500 2 22 11,000 3 21 10,500 4 21 10,500 5 21 10,500 For three-year recovery property, only 6 percent or $600 of the asset's value is to be deducted from tax liability for ITC (under the Economic Recovery Tax Act of 1981). The percentage and before-tax ACRS deductions are the following: Table 5.2 ACRS Deductions--Three-Year Recovery Property Year Percent Deduction Before-Tax Amount 25 $ 2,500 37 3,700 38 3,800 The analysis assumes no carry-forward for unused ITC, but simply treats it as an after-tax inflow for year 1 and discounts it appropri- ately. 2. Finance Period Both classes of property are assumed to be 70 percent financed with annual amortized payments made at the end of the period (in arrears). 69 The three-year recovery property is financed for three years, and five- year recovery property for five years. It is assumed the down payment is made in year 0, prior to the beginning of the amortized period. Reference to Tables 5.3 and 5.4 shows the before-tax down payment amounts, plus the amortized payments of principal and interest for both classes of property. The tables are for 10, 15 and 20 percent interest on debt, which are the three variable interest rates used in the analysis. Table 5.3 Amortized Payments--Three-Year Recovery Property (Down Payment = $3,000) Year 10% Interest Principal Balance 0 $ 7,000 1 $700 $2,115 4,885 2 489 2,326 2,559 3 256 2,559 0 Year 15% Interest Principal Balance 0 $ 7,000 1 $1,050 $2,016 4,984 2 748 2,318 2,666 3 400 2,666 0 Year 20% Interest Principal Balance 0 $ 7,000 1 $1,400 $1,923 5,077 2 1,015 2,308 2,769 3 554 2,769 O 70 Table 5.4 Amortized Payments--Five-Year Recovery Property (Down Payment = $15,000) Year 10% Interest Principal Balance 0 $35,000 1 $3,500 $5,733 29,267 2 2,927 6,303 22,961 3 2,296 7,631 16,024 4 1,602 7,631 8,394 5 839 8,394 0 Year 15% Interest Principal Balance 0 $35,000 1 $5,250 $5,191 29,809 2 4,471 5,970 23,839 3 3,576 6,865 16,974 4 2,546 7,895 9,079 5 1,362 9,079 0 Year 20% Interest Principal Balance 0 $35,000 1 $7,000 $4,703 30,297 2 6,059 5,644 24,653 3 4,931 6,773 17,880 4 3,576 8,127 9,753 5 1,951 9.753 O C. Additional Assumptions for Lease 1. ITC and ACRS Deductions With both three-year and five-year recovery property, it is assumed that the lessor takes both the ITC and ACRS deductions. 71 2. Lease Term The lease term for three-year recovery property is three years, and for five-year recovery property is five years. The analysis further assumes all lease payments are due annually at the end of the period (in arrears). 3. Security Deposit and Buy-Out In this analysis three different types of lease agreements are con- sidered. First, assume that no security deposit or buy-out amounts are included. The relevant cash flows for the lease option are simply the lease payments and the residual or salvage value. Second, a 10 percent (of asset cost) security deposit is made prior to the beginning of the lease (year 0). The security deposit reduces the cost basis from which the lessor determines his lease payments. For example, with three-year recovery property, the $1,000 security deposit is paid prior to the beginning of the lease. The lessor will retain the $1,000 reducing his out-of—pocket costs for the asset to $9,000. In other words, the security deposit can be thought of as an upfront pay- ment. The analysis assumes all security deposits earn interest income of 10 percent annually paid by the lessor. The income earned by the lessee is treated as ordinary income and taxed accordingly. For purposes of this analysis, it is assumed that the 10 percent interest income is not compounded. The lessee receives a payment for such amount from the lessor for each year of the lease term. Security deposits are treated the same way for five-year recovery property; however, the 10 percent amount is $5,000. 72 The third type is that no security deposit is required, but the agreement includes a fixed price buy-out of 10 percent of asset cost at the end of the lease term. As discussed in Chapter IV, the lessee is allowed ACRS deductions on the buy-out amount since this becomes his new cost basis for the property. The deductions are taken in the following three or five years after the termination of the lease depending whether it's three-year or five-year recovery property. In the next section a series of figures are displayed depicting the optimal-equivalent lease payments on a before-tax basis. This BREAK- EVEN payment is the annual amount which equates the NPV of the lease option with the NPV of the buy option. In other words, at all points along the BREAK-EVEN lines, an individual is just as well off to lease as to buy, given the assumptions so stated. One must remember that these annual payments are given in before-tax dollars, but the analysis is conducted on an after-tax basis. After a brief introduction, the section discusses the interpretation of the figures as well as some of the effects the variables have on each series of figures (i.e., tax rate, opportunity cost and interest on debt). 0. Figure AnaLysis This section is divided into two segments. The first is a series of figures displaying the optimal-equivalent lease payments holding the desired rate of return or after-tax weighted average cost of capital constant at 12 percent. It is felt that the 12 percent rate is very commensurate with the current economic condition. It represents an average yield one can expect to receive on both short-term and long-term 73 current market securities. Although a higher rate would be more consistent with what investors desire as a return, it is felt that the 12 percent rate will act as a realistic benchmark in the next three to five years, with the expectation of deficits decreasing and interest rates beginning to fall. The variables for each figure are tax rate, opportunity cost, secur- ity deposit, buy-out, interest rate on debt and property class according to the conditions of the buy and lease agreements being analyzed. The second segment displays a series of figures which assume 0 opportunity cost, with no required security deposit or buy-out for the lease agreement. The desired rate of return is variable at 12, 16 and 20 percent to allow some flexibility not given with the previous figures. The interest on debt is again left variable at 10, 15 and 20 percent. The reader may assume that all assumptions discussed in the previous section are considered, and that it is purely a judgmental decision on his or her part to select the figure which most appropriately considers the factors involved with their desired asset. The figures are not meant to serve as the sole decision criteria, but are simply a tool to help guide the reader towards making the most economical financing decision. Since the interpretation of the following figures is consistent for each, an explanation of the interpretation follows. After each series of figures is a discussion of the variables and their effect on these figures. 1. Interpretation The figures offer a prospective investor an easy method of determin- ing whether it is more economical to lease or purchase an asset. Once 74 all of the factors involved in the decision are known, reference to one of the following figures allows the investor an easy method of determin- ing the proper financing decision by comparing a quoted lease payment from a prospective lessor to the optimal-equivalent BREAK-EVEN lease payment on the figures. The simplest way to explain the interpretation of the following figures is through an example. Let's assume a prospec- tive investor has the following assumptions for a purchase or lease option. Purchase Agreement (Three-Year Recovepy Prgperty) Asset cost - $10,000 70% financed, amortized for 3 years at 10% annual interest Receives ITC in year 1 Takes ACRS deductions in years 1-3 Useful Life = 8 years Salvage = $2,000 Opportunity Cost = 5% Lease Agreement (Three-Year Recovery Property) Annual Lease Payments = $4,100 Security Deposit = $0 Buy-Out $0 Salvage $2,000 The proper choice of figures in this example is Figure A.1. Refer- ence to this figure shows if the investors tax rate is about 34 percent or less, the BREAK-EVEN lease payment is less than the quoted lease pay- ment, thus the decision is to buy. At any tax rate above 34 percent, the BREAK-EVEN rate is above the quoted rate, therefore, the correct financ- ing decision is to lease. A total of 24 figures is included in the analysis representing three-year and five-year recovery property. The reader should Choose the figure which best considers all factors involved in his decision. The question is, how can these figures be put to use if the asset costs more or less than $10,000 for three-year property and $50,000 for 75 five-year recovery property? This represents no major problem. It simply calls for a conversion of asset cost from the quoted rate of the decision maker, to an equivalent rate which can be analyzed with the use of this figure representation. Again, an example here should help clar- ify how to convert these costs, however, there are some important char- acteristics which should be discussed first. After reading the assumptions of this Chapter, it should have been noticed that both security deposits and buy-outs, when applied for the leasing alternative, are consistently 10 percent of the asset cost. After evaluating several actual lease agreements, and discussing terms offered with leasing companies, it was found that these 10 percent fig- ures are very typical for the leasing industry. Not only are the figures typical, but this fact allows for easy conversion in the case of differ- ing asset costs. Furthermore, the assumptions made under the purchase alternative are also typical of what types of agreements both manufac- turers and dealers are offering. With this in mind, it is hoped that the chosen statistics for this analysis will be typical for a large portion of lease versus purchase decisions, and the only factor warrant- ing change will be the cost of the asset. One must remember that this analysis is only an approximation to the correct decision. To accurately determine the proper financing decision, it is recommended to analyze each example employing Net Present Value techniques as discussed in Chapter IV. All that is necessary for the reader choosing to use this analysis is to determine what proportion the desired asset is valued above or below the analysis cost of the asset. Then one can adjust the quoted lease payment accordingly so it may be compared against the BREAK-EVEN 76 rates on the figures. First, let's consider the case of a desired asset valued greater. Assume that an investor can either lease for $5,500 annually or pur- chase a $13,500 asset. Further, assume that both transactions meet all of the assumptions stated previously in this chapter, and that the lease has the characteristics of Figure A.1 as used in the interpreta- tion example. The first step is to determine what percent the $10,000 asset is of the $13,500 asset. This is found by dividing the $13,500 into the $10,000, or: $10,000/$13,500 = 74% Since the desired asset has a higher cost than the $10,000 asset used in the analysis, the quoted lease payment from the lessor must be adjusted downward to reflect the additional cost of the desired asset. This adjustment is based on what percent the $10,000 analysis asset is of the desired asset (as determined above). The lease payment is adjusted by multiplying this amount times the relative percentage, or: $5,500 x 74% = $4,070 = adjusted annual lease payment This adjusted payment can be compared to the BREAK-EVEN amounts at the given tax rates and levels of opportunity cost. Reference to Table 5.5 shows the financing decision for all combinations of tax rates and levels of opportunity costs. The table demonstrates that leasing is the most economical way to finance the asset given the quoted lease payment of $5,500 except at tax rates of 20 percent and less, and a 5 percent opportunity cost. Although this analysis makes many assumptions, and there may be other outside factors preventing the investor from leasing, the use of these figures offers a quick estimate of which alternative is more economical. They are simply a time-saving device. 77 Table 5.5 Least-Costly Financing Decision (for Assumptions Consistent with Figure A.1) OPPORTUNITY COST (%) 10 20 30 4O 50 5 10 15 Buy Lease Lease Buy Lease Lease Buy Lease Lease Lease Lease Lease Lease Lease Lease Lease Lease Lease 78 The second possibility is the desired asset is valued at less than the analysis asset. This process is the reverse of the previous. In this situation the lease payment must be adjusted upward to reflect the proportional differences between the desired asset and the cost of the analysis asset. Again, an example will help to clarify. Assume an investor can either lease for $3,200 annually or purchase a $8,000 asset. Again, assume that both transactions meet all of the assumptions stated previously in this chapter. Assume that the property in question is three-year recovery property and, as previously, has all the characteristics consistent with Figure A.1. A five-year recovery property example could just have easily been used since the same adjust- ment process should be used for either class of property. First, deter- mine what percent the desired $8,000 asset is of the $10,000 analysis asset. This is found by dividing the $10,000 into the $8,000, or: $8,000/$10,000 = 80% Since the desired asset has a lower cost than the $10,000 analysis asset, the quoted lease payment must be adjusted upward to reflect the additional cost of the analysis asset. This is calculated by multiply- ing the quoted lease payment times one minus the percentage that the desired asset is of the analysis asset plus one, or: $3,200 x K1 - .80) + U = $3,840 = Adjusted Annual Lease Payment Reference to Figure A.1 shows at any tax rate or level of opportun- ity cost, the most economical financing decision is to lease since the adjusted quoted rate is always below the Optimal-equivalent BREAK-EVEN rates. Now that the interpretation and use of this figure analysis has been explained, the next section displays the figures divided into various 79 series based on whether security deposits or buy-outs are included in the lease agreement. Each series includes a figure for the three vari- able rates of interest on debt for both three-year and five-year recovery property. Reference to Tables 5.6 and 5.7 shows the breakdown of each series and the assumptions for each figure. Before each series of figures is a brief explanation of the variables and their effects on the figures' appearance. The figures have been grouped in this manner to help minimize the analysis of variables. ReferenCe to series A shows the similarity between the figures as long as the security deposit and buy-out amounts remain constant. Table 5.6 Figure Series--Segment I Rate of Return = 12% Figure Series A Security Deposit = $0 Buy-Out = $0 Interest on Debt = 10, 15, 20% Opportunity Cost = 5, 10, 15% 3-Year Recovery Property--Figures A.1 - A.3 5-Year Recovery Property--Figures A.4 - A.6 Figure Series 8 Security Deposit = $1,000 or $5,000 Buy-Out = $0 Interest on Debt = 10, 15, 20% Opportunity Cost = 5, 10, 15% 3-Year Recovery Property--Figures B.1 - 8.3 5-Year Recovery Property-~Figures B.4 - 8.6 Figure Series C Security Deposit = $0 Buy-Out = $1,000 or $5,000 Interest on Debt = 10, 15, 20% Opportunity Cost = 5, 10, 15% 3-Year Recovery Property--Figures C.1 - C.3 5-Year Recovery Propert --Figures C.4 - C.6 80 Table 5.7 Figure Series--Segment II Rate of Return = 12, 16, 20% Figure Series D Security Deposit = $0 Buy-Out = $0 Interest on Debt = 10, 15, 20% Opportunity Cost = 0% 3-Year Recovery Propert --Figures 0.1 - D.3 Figure Series E Security Deposit = $0 Buy-Out - $0 Interest on Debt = 10, 15, 20% Opportunity Cost = 0% 5-Year Recovery Property--Figures E.1 - E.3 -- Figure Series A With this series of figures as the tax rate increases, the NPV for the buy option is less negative (less costly). Referring to the figures shows the BREAK-EVEN lease payments increasing as the tax rate increases. One would expect the opposite since the buy option becomes increasingly attractive as the tax rate increases, however, an investor can afford to pay higher lease payments (in before-tax dollars) since the payments are tax deductible. Reference to Figure A.1 shows the BREAK-EVEN pay- ment increasing from roughly $4,000 to $4,200 at a 5 percent opportunity cost and from a 0 to 50 percent tax bracket. These figures assume no security deposit is required for the lease option. Thus, the opportunity cost is only applied towards the down payment under the purchase option. This additional cost reduces some of the tax savings under the purchase option and causes the BREAK-EVEN lines to have a steeper slope. “as! Parr. 81 Again referring to Figure A.1 one can see that as the opportunity cost is increased from 5 to 10 to 15 percent, the BREAK-EVEN lines shift upward. The lines shift upward because the buy option becomes more costly (less attractive) as the opportunity cost is increased. Thus, the annual lease payments must increase to equate the two options. One should notice that the vertical axes are adjusted upward as the interest on debt capital increases (refer to figures). This is because as interest increases, the buy option becomes more costly (less attrac- tive), ceteris paribus. The lease payments must increase to equate the two options. )hauacaa )olu‘dccsua act“) uuolh 1‘ 0 Irhla - orb. 82 hcoo >-zc~mommc Nm— ttt coco >puzcbocmmc xou.ttt comm oc¢m comm occm comm comm comm coc¢ ooav oouv oomv cove cocv oocv oobv uhcz xch hmou r—uzohzommo No.21. om ow om ON ca. 0 66:0666600066060061udllflflll l lllll (1.1.1:.-. 11... .111 1-1. 1.1-1.11... s\ssll “slitttslostltt .01.. 1.11 .V1 $1. 1.1.\ lull-”11111. .111 1.1.1.1 tutttttiittt... . \\flk\\\\ Nouuhmmo zc hmmzmhzu .ouhco>cm .on.muc .omm >h¢umocm >¢u>cow¢ JWM> wwmzh H.< 9.5 I oomv 32236—1 4183th a.q:>-:u121— Hz 0 83 cm cv who: xch om cw hmco >p~z=h¢cmmo Nm— ttl hcco >h~zcbzommc xo—.Ttl hwco >-chzcmmo xm.e:. cu o .‘.'.. 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H.......-..---..H. 1.. iiii... ‘01 “heist-settltllt . tut-11 I Octet‘llb‘|\|6 \e.e1el. aballe‘s .el u1n111 is. w\ Ncmnhmuc zc hmmmwbz— .cuhccrom .cn.mmc .cum rhcmccmm >¢m>ccum mcm> mums» m.< p.53... comm $22334 All-16491.11 L¢>=U2h ~02 O 85 cm cv whom xcp cm o .“ ..-...-.‘. it 'I‘ODIIIIIOIIIOII “‘I Taoist-ts Nc—uhmuc zc hmucMhzu .cnhcc>cm .cn.mmc .omm >bmmmocm >¢m>ccmm com» u>~u 2 23: mczcmcczh bmcc >h—2chmcccc xmu its hmcc >h~zcbmcmmc Ncu.ttl hmcc >h—zchcocmc Nm.::. c— c— m.c~ a“ m.- «— m.N— m— m.m— ¢— m.v— m— m.m— m— m.m~ p— 322264 culls-ICED“ LG>=UZP N2 0 NJ." .110 ands:- 86 cm cc whcc xch om c bmcc >p~zc~ccmmc Nm— tit hccc >h~zccccmmc xc—.ttr N o ..-.q IIIODIIIIII c.06000000000000* "1 ‘.‘. ‘.‘. ‘I‘O‘O ‘1 “"‘ - 5‘ Nm—uhmmc zc bmu¢Mhz~ .cuhcc>cm .cn.cmc .cum >hmmmccc >cu>ccu¢ com» m>~m m.< meamHa mczcmcczh hmcc >-zchmcmcc Nm.1:. a. c «u m.—— «— m.w~ mu m.m~ vu m.v— m— m.m— m— m.c— c— m.c— mu CZZDC-I All-ICON 0.33-21921- H2 0 87 hmcc rhuzohmcmmc Now its hmcc >h~zohmcmmc sou.ttt who: xch pmcc >p~zohcccmo Nm.ti. cm cv om cm on c .0 0.01 0000.. .000M v............ 0.... -00.... Ncmubmuc zc pmmzmhz~ .cuhoc>cm .cu.mmc .oum >b¢mco¢m >mu>ccmc com» u>~m mczcmcczp a.< meamHa mu m.m— v— m.v— m— m.m— m— m.m— c— c.9— m— m.mu mu m.m~ cN czzcca aucmm cc»:mz~ ~2 o 88 -- Figure Series B With the introduction of a 10 percent security deposit into the analysis, the BREAK—EVEN lines are negatively sloped (refer to figures). As the tax rate increases, ceteris paribus. the NPV for the buy option decreases. Much of the tax savings which occurred in Series A is lost since the security deposit reduces the basis from which the lease pay- ments are determined. Therefore the BREAK-EVEN lease payments decrease to equate the two Options. At a 5 percent opportunity cost the BREAK- EVEN payment for three-year recovery property at 10 percent interest on debt is reduced by about $240 from O to 50 percent tax rate (Figure 8.1). The security deposit is capital required upfront prior to entering into the lease tenn. As stated previously an opportunity cost is applied to this amount for the term of the lease agreement. These two factors further reduce the BREAK-EVEN lease payment as the tax rate increases. As with Series A, as opportunity cost increases the purchase Option becomes more costly, and the lease payments must increase to equate the NPV's. Referring to the figures, this series appears to have an inter- action between the security deposit, tax rate, and when the opportunity cost is set at 15 percent. The BREAK-EVEN line is relatively flat thus the lease payment is fairly constant at any tax rate. The tax savings from the deduction of rental payments are offset by the loss of interest income and the oppor- tunity cost applied to the security deposit as the tax rate increases. 89 As with the previous series, as more interest is paid with a purchase option, the lease payments must increase to equate the two alternatives. Again, referring to the graphs the vertical axis are adjusted upward for each figure as interest on debt increases. 90 cm whom xch cm hmcc >p~zc~mcmcc Nm— tti hmcc >h~zchmcccc xc—.121. umcc >h~zchccmmc Nm.I:. c— "‘ .‘.‘.".‘... ' V-.‘..‘..... mun-t lll‘ll _ —. u"-...-.. .lsunuflnnnunw gt"|l Nounhmmc zc hmmthzu .cuhccrcm .cccuou.mmc .omm >h¢mmcmc >¢m>ccmm com» munch .m mcacvm comm ocvm comm comm comm comm comm coco couv chv comm covv comv oomv cocv cccv czzccHs JUCCOIU L¢>=U2h --z 0 who: xcp cm .“.u Pillilllh all l-‘l"‘L v5-5-55“|ll I‘ll] 411111141 91 xm—uhmmc zc hmmcmhzc .cuhcc>cm .ccc—ou.mmc .cmm >pmmmcmm >¢m>ccmm mom» mmmzh N.c mg: P... hmcc >p—zcbccmmc Nm— tit hmcc >h—zcccccmc Nc—.tel hmcc >-zopmccmc Nm.-2: comm occm comm comm occv ccuw ccmv ccmv ccvv comv com. cocv ccmv ccmv occm occm 32236-3 JUG‘DU cca-zmzo— H2 0 hmco »~_zchmccmc Nmu ttt bccc >p~zchccmmc Nc~.tel who: xch hmcc >p~zoh¢cmmc Nm.s:: cm cw cm on cu c one» 111...... 8mm ................ o8. “hill! flung-000000030. °°d * .1..l.l.l-L ccmv 755555555551 92 Nilltttttt.. ccmv ccvv comm ccmv coco ccmv ccmv occm cc—m comm comm xcmnpmmc zo hmmchzu .cuhoc>cm .occ~ou.cmc .cmm >~¢mmcmm >mm>cwwm ccmw mums» we: “_ CZZDGJ JUG‘DU fl-¢>-=I.UZI- Hz 0 93 cm cv o who: xch hmcc >p~zchmcccc xm— tit pmcc rhczcbccccc Nou.ttl hmcc >-chmcmmc xm.::. m cm cu (ful ...‘..‘: ‘.‘ -."I' I 5050505050- j...‘..11 l l 0005...; CICIU‘OI'CL . “5"II'-'-I f"l"'““|” lllllll'll r'lIIUUUUUUU sonuhmmc zc hmmmm~z~ .cuhcc>cm .cccmou.mmc .cmm >hcmmccc >¢m>ccm¢ com» m>~m ¢.N aczmHa mczcmcczh c— m.c— an m._u «— m.- mu m.mu v— m.v— m— m.m— m— m.m— 9— 3:22:34 JUGCDU a.a:>-=tuzo- Hz 0 cm whom xch cv 94 um—uhmmc zc bmm¢m~zc .cu~cc>cm .cccmou.muc .cmm >bcmmcmc >¢m>ccm¢ mom» m>~m m.m meamHa hmco >pczchmcmmc Nmu tti hmcc rhuzcbccmcc xc—.Itt hmoc >-zchccmcc mm.s:. cu m.“— N— m.“— m— m.mu v— m.v~ mu m.m— mu m.m— cu c.5— mu mczcmcczh 32233-1 All-I‘m“ L¢>=U2h ---z 0 hmco >p~chccmcc xm~ 111 hmcc >p~zchzcmmc Nc—.ttl whom xcu hmcc >-zcbmcccc Nm.2:. 8 . H: 8 8 H: a r0600 00000 ”d LIT HE: v— 95 - m.¢— A 1111‘ l ‘1‘ ll‘llll‘llll‘ m.m« mu m.m— cu m.bu mu m.mu ‘lllll m— m.m— . cN Ncmuhcmc zc hmm¢Mhz~ .cnhccrcm .coomou.mmc .cmm >h¢mmcmm >mm>ccmc mom» m>~m mczcmccmh a.m peamHa czzccm .JUC‘DU L¢>=lfl2h Hz 0 96 -- Figure Series C Referring to Figures C.1 - C.3, one can see that the BREAK-EVEN lines are not consistently positive- or negative-sloped. The BREAK- EVEN lines at a 5 percent opportunity are negatively sloped. The tax savings from the ACRS deductions taken after the buy-out override the opportunity cost applied to the purchase down payment. The buy-out amount has the same effect as the security deposit in Series B. It reduces the basis from which the lessor determines lease payments. To see this point compare the starting point at 0 percent tax rate for the BREAK-EVEN lines in Figure C.1 to the starting point for the BREAK-EVEN lines in Figure A.1. The BREAK-EVEN lines for three-year property at 10 and 15 percent opportunity cost and all the lines for five-year property (Figures C.4 - C.6) are positively sloped. Again, as in Figure Series A, one can afford to pay more for the lease as the tax rate increases (in before- tax dollars), since the lease payment is tax deductible. Again an increase in Opportunity cost forces the BREAK-EVEN line upward illustrating that the buy option is more costly, or that one can afford to pay more for a lease when a higher value is placed on the equity capital required for a purchase. The vertical axis are again increased to reflect the needed increase in lease payments to equate the two options as interest on debt increases. 97 cm ov cm who: x:— cm hmcc >h~zc~ccmcc xm— tti hmcc >-zchccmmc Nc—.lll. hmcc :czchmcmmc .\.m 1... c— c 300000000000. 20000000000000 0|| 00000lw0l0nfl0l I‘ll. Lill’ 01100 It. v“.fl1llltll I I I-u‘000000000l 0‘ “ 0000. I0 60‘ ‘| “P0000000000L 00 V000000000 Nouuhmmc zc hmm¢m~z~ .cccconhcc>cm .cucmc .cmm >hmmccmc »cm>ccmm com» mmmzh H.u meamHa comm covm. comm comm occm comm comm cocv coav ccmv ocmv ccvw ccmv ccmv occm, ccmv 622307...) 419360“ 0.¢>-=1u21— Hz 0 98 hmcc >p~zchmcmcc Nm_ 111 hmcc >hczchmcmmc xc—.Itt test-Its Nm—uhmmc zc hmmmm—zu .ccc—ouhcc»cm .cn.mmc .cmm >hcmccmm >¢m>ccmm «mm» mmczh N.c mg: _m coon cop» comm comm coo. coH. OON. com. ace. cow. coo. oops can. some occm ooHu who: xch hmcc >-z=h¢cmmc Nm.::. cm cv cm om cu c ttlstttslsststslctltsle 10001114 110040410001111 1111 06501 .Illlllslsltltlla III-011111? lllll It I 111111 0000000L Isles-.00 “I'll 00.n00000016000 ,E _ ik‘leDI-slalleeb‘ OBIBIIH:IOB.J ._th€=&flHLI O-CIJh-83hJIIJ-v #4:: 'CD 99 NoNuhmmc zc bmm¢Mhz~ .ccc—ou~cc>cm .cn.cmc .umm >~mmmcmm >mm>ccmc mom» mmmzp N.u acamHL pmcc rhczcbccmmc No" 111 hmcc >hczch¢ccmc xc_.1rt comm ccmm cccv oc—v ccmv ccmv occm ocmv ccmv occm ccmv oomv occm oc—m comm comm whom xch hmco >b~zchmccmc xm.e:. on 3 8 S H: a .El Kellen-00000001 IIUUUUHUIIU lllllllllll 0.1111101011110111 call-0‘0 nw0000000000a .00 mzzcma JUCOU LG>=UZh Hz 0 100 cm cw mhcc xch om c hmcc >h~zc~ccmmc xmu ttt hmcc >h~zchcoccc xc—.III hmcc »h~zchzcmmc Nm.2:. N c u o “.1 -1111 0190011" ‘1' 1‘Illtl I .Ncuubmmc zc hmmmmbz— .cccmonhoc>cm .cnncmc .mmm >H¢mmo¢m >¢m>cou¢ can» u>~u 4.8 pczmHa mczcmcczh cu m.c— an m.—n «— m.~— m— m.m— v— m.v~ mu m.m— m— m.mu h— GZZDG-I 41.1.1360“ L¢>=U2h ii: 0 101 hmcc >h~zchmcmmc sm— ttt hmcc >-zchcccmc Nc—.itl whom xch pmoc >-zchcccmc Nm.1:. on 3 8 8 H: . o 10" 0'17 11% 1: 114: T J 00000 0.00.00.-- ‘. smuubmmc zc hmM¢Mhz~ .cccmouhcc>cm .cn.cmc .cmm >hcmmcmm >cm>ccm¢ 2cm» m>~m mczcmcczh m.u mesmHa «a m.«— «a m.Nu mu m.m— vu m.¢n mu m.m~ m— m.m« bu c.9— mu 32236—1 ANCCDN QG>=UZF 1": O 102 hmcc >-zchmcmcc Nm— tit hmcc >p~zchcccmc xc~.121 who: xch hmco >-zc~mcmmc Nm.2:. on 8 8 3 H: . o 2 92 I - - - 9: mm 00100103000 be m" 00000000000000... 0000001 e0 00000-00004 0“ .111... 92 11. . 2 ..l 9: S 92 2 9H: .yu scmuhmmc 2c hmmcmhzu .cccmon~cc>cm .cu.mmc .cmm »h¢mccmm >cm>ccm¢ mam» m>~m mczcmcczh 8.8 atamHa czzcmm AMIGO“ L¢>=M2h an: O 103 -- Figure Series D This and the following series Of figures allow the desired rate of return to vary from 12 to 16 to 20 percent. As stated previously, this analysis assumes no opportunity cost, security deposit, or buy-out, and a 10 percent salvage or residual value. All prior assumptions stated in this chapter are considered. The interpretation of these figures is identical to the previous figures. As the tax rate increases the BREAK-EVEN lease payments also increase. A lessee can afford to pay more in before-tax lease payments since the rent is tax-deductible. Reference to the figures shows the BREAK-EVEN lines shifting upward as the rate of return is increased. This is because at lower rates of return, the present value (discount) factors are higher and the NPV is more negative (more costly). As the rate of return is increased the present value factors are less. Thus, as the buy decision becomes less costly, one can afford to pay higher lease payments since future pay- ments are cheaper (in present dollars) as the rate of return increases. Again, as the interest on debt increases, the buy option becomes less attractive (more costly). The lease payments must increase to equate the two NPV's. The vertical axis are adjusted upward to reflect the increase in interest on debt. 104 acmnthumcc mo boom 111. sm—uamhummc mo hmcc.t:l comm cmmm comm cmmm cccv omcv oc—v cmuv ocmv who: xmh smuuachucmc mo bmco.::. cm cv cm cm cc o _ “00000000000000. '0 L '0‘1600‘01 I00. ltl|\.u1r.t\.t 11 1111 \\\.\\..\\\ \\.Tsn. \\\ No—nbmmc 2c hmmmmhzc *hcmmcmm >mm>ccm¢ mom» munch H.c mcamwm cmmv comv GZZDGJ .1111ch LG>=UZP ~02 O 105 NcNqu—umcc mc hmcc tlt xm—ucchzcc mc hmcc 1.1 cccv cmcv cc—v cmuv chv cva ccmv ommv ccvv whom xmh NN—uambummc mo bmcm.2:. cm ov Om ON o— 0 0000000. .DNalll 1 1| burn-0000000000? 100051000000 I00 0‘6 ‘0‘Nll 50000000003001. 0‘11. \to \\.1 111111 \\V|..\\1\ .a1ntta. \\\\. . ,ltl\\ n\\ xmuuhmmc zc hmmmmbzu >hmmmcmm »cm>ccmm mom» mmmzh N.o OcsmHa cmvv comv 32236—1 .JUG‘DIIJ L¢>=NZP Hz 0 106 xcuucmuumcc mo hmcc ttt smuncmhzmc mo .58 1-1 mounhcmc zo hmmzuhzc >h¢mmo¢m >¢u>oum¢ can» mama» m.o mezmHu come cmme ccvv omvv ccmv cmmv ccmv cmmv coco Uhmx xch NNouChumcu to hwoutsit om ov. on ON 0— o _ ........L 171101111 .11 .\... 11.. 1. 1.1a.\i.t 111llflr1112 \ \k“ 4...... cmcv ccmv mzzcmo AUC‘DU EC>=UZF H2 0 107 -- Figure Series E A change in the tax rate has virtually the same effect with five- year recovery property as with three-year. However, reference to Figures 0.1 - E.3 shows the BREAK-EVEN lines at a 12 percent desired rate of return negatively leped. (The BREAK-EVEN lease payments de- crease on both a before- and after-tax basis as the tax rate increases.) This occurrence is partially caused by the five-year recovery property asset valued at five times the three-year asset. Due to this, some of the overriding effects of lease payment deductions are lost. This, along with the fact that an investor receives the full effect of the tax savings from ITC ahd ACRS deductions (since no opportunity cost is applied), force the BREAK-EVEN rate to decrease as taxes increase. There is an interaction between the 12 percent rate of return and the tax savings under both financing alternatives. As with Figure Series D, the BREAK-EVEN lines shift upward as the rate of return is increased since future payments are cheaper (in pre— sent dollars) as the rate of return increases. Reference to Figure E.1 shows an investor in a 50 percent tax bracket could afford to pay approx- imately $700 more annually with a desired rate of return of 16 percent compared to 12 percent. As more interest is paid with a purchase, the lease payments must increase to equate the two options. As previously, the vertical axes are increased for higher rates of interest on debt. 108 scmnamhummc mo bmcc.ttt sm—uachummc mo hmco.ttl. who: xmh . xm—nmcpumcc mo hmcm-II- cm cv cm om c« c _ . NH -...-..-..-..T.Illl - : ....... H.NH «.m— m.~— v.“— ..-..-......t-t..- 9N. .‘l ‘-fl 0000‘ .0‘000 00 1.11... 99 Ill-Ill. 92 92 111.11.... 92 .11.... 2 . 3: 1T «.2 ....-A . m.NH _.||ut- _ v.»— m.m~ xc—uhmmc 2c hmm¢Mhz~ >h¢mmccm >¢m>ccmm mom» m>~m mczcmcczh H.“ mesmHa 3223:..1 .JUC‘OU EG>ZUZF Hz 0 109 on ov on when xch souuacbumcu ma been It: No—uachumco me hwou.ler xN—uachumcu Lo hmoo.2:. o— o _.“..'.-‘...-.: v..|--"....- {if-.05: .Illtlllill|l .-II.‘-|.‘.‘ v. I“.‘.l‘1 xm.uhouo ze _ou¢uhz_ >~¢umo¢m >¢u>eou¢ ecu» u’_u ~.m mgampu oozmwaozh mg “.m— «.m— «.m— v.9— m.mu o.»— b.»— o.m— a.m— v~ —.vu N.vu m.¢u v.o~ u.v— czzaca aucmu L¢>=U2h a: o “fig “a ma £5. 5: $3528 .3 58 um“... ow o¢ am an o— o m.v— v.w— .‘... .... : u... nun-11131 9v— h.v~ o.v~ m.v— 110 I 1-! final! 111.11.... B ‘-‘-“‘|l.l «.m— «.m— ‘II‘II‘I'IuIIIIL “0 m“ ..II Nil-W *Omd “it! m.m~ b.m— o.m~ sowuhmmo zo bwumuhzu >b¢mmo¢m >¢u>oou¢ «cu» u>~m mnzcw302h m.” mgzmwk \1—1 9m. \\ . \‘ GZZDGJ .JUCWU L¢>-=|IJ2|— u: 0 111 E. Summary These figures offer both a quick method for determining the proper financing decision, and they demonstrate the importance of the vari- ables involved in an investment. Again, these figures are not meant to act as the sole decision criteria in any or all financing decisions. It is hopeful that individuals will use these figures as a temporary or back-up decision and determine the proper decision with the use of Net Present Value techniques discussed in Chapter IV. One must be careful to understand not only all of the relevant variables involved in his or her investment alternative, but also to understand the assumptions through which these figures are developed. CHAPTER VI SUMMARY, CONCLUSIONS, AND NEED FOR FURTHER RESEARCH A. Summary To facilitate the realization of the increased benefits from both ITC and ACRS deductions, the Economic Recovery Tax Act of 1981 contains certain provisions that allow the transfer of credits and deductions related to investments in new equipment, and further increases the pos- sibility of leasing as a financing alternative. Nhile leasing has been an accepted part of our federal tax system for years, these provisions, known as "Safe Harbor" leasing rules, are a significant extension of prior tax policy and principles. It is not surprising that they have generated much discussion and controversy. Much of the discussion has centered around the impact of "Safe Harbor" leasing on investment deci- sions, concerns about inefficiency and excessive benefits to those buy- ing tax benefits, concerns whether these guidelines will aid smaller, less-profitable businesses, and speculation about the consequences of repealing these provisions. This text has explored and analyzed the "Safe Harbor" guidelines with major emphasis in the analysis section addressed to the concern of whether these guidelines can aid smaller, less-profitable businesses. Tax benefit transfers through the use of "Phantom Sale-Leaseback" agreements are discussed in detail in the qualitative chapters. However, 112 113 in Chapter V, where the analysis of the lease versus purchase decision is examined quantitatively, all lease agreementsare simply two-party capital leases. Whether or not the lessor transfers some of the tax benefits is considered irrelevant to the firm-level analysis. An attempt has been made to present the analysis in a simplified and systematic manner so that farmers as well as other interested individu- als could expand their knowledge in this area. Chapter I introduced some of the new terminology as a result of the Economic Recovery Tax Act of 1981. The term "Safe Harbor" was defined as well as the principal requirements needed for eligibility. An alternative financing scheme known as EDC financing was briefly dis- cussed and then analyzed further in Chapter III. The next chapter began with a discussion of the three major types of leases. None of these lease agreement are new, but with the enact- ment of the new "Safe Harbor" guidelines, greater advantages are given to both capital and "Phantom Sale-Leaseback" agreements. Following the types of leases were the specific guideline changes which created these advantages. The fixed price buy-out Option helps to eliminate any hesitancy prospective lessees had towards asset appreciation. The three-month "grace period," along with eliminating profit as a criteria for a lessor, facilitates the transfer of tax benefits under a "Phantom Sale-Leaseback" agreement. Chapter III discussed possible factors a lessor should consider about the credit worthiness of a lessee. Although every lessor has their own evaluation criteria, it is important for both parties to realize that leasing is simply an alternative financing method and should be evaluated as such. Careful evaluation by both parties may 114 still leave some loose ends with any financing agreement. Some of the contract provisions which have caused grievances in the past were discussed as were some of the concerns a lessee should be aware of prior to entering into a lease agreement. As mentioned previously, a more thorough discussion of Michigan Public Act 501 (EDCs) followed the concerns for a lessee. This method of tax-exempt financing is increasing in popularity. Many farmers are confused about the consequences of this act, and this section hopefully helps to eliminate any misconceptions. At the close of Chapter III some of the principal advantages to leasing versus purchase were discussed. Again, the advantages do not apply to every investor and/or every investment decision. The pros and cons of advantages to disadvantages must be weighed for each decision, and then, as suggested previously, a quantitative technique such as Net Present Value should be employed. Chapter IV discussed the quantitative factors involved in making the most economical financing decisions. The Net Present Value method was chosen as the decision criteria since it is perhaps the best current method of evaluating financing alternatives. The chapter began with a section on determining the relevant after-tax cost of capital to be used as the discount factor. It then discussed the cash flows for three types of financing alternatives: 1) a purchase; 2) a two-party lease; and 3) a "Phantom Sale-Leaseback." Each alternative was followed with a Net Present Value example demonstrating the proper use of this tech- nique. It was hoped this chapter would act as an introduction to Chapter V so that little detail of the determination of the analysis statistics would be required. 115 Chapter V, utilizing case examples, attempted to demonstrate what the optimal-equivalent lease payment would be given certain assumptions. As stated previously, this case example analysis is based on several specific assumptions. These assumptions were stated prior to the figure analysis and were followed by a section describing the interpretation of the figures. The reader should thoroughly understand these sections before proceeding to the figures themselves. This chapter also demon- strated the importance of incorporating all relevant variables into the decision criteria. Failure to do so can reverse the decision from the proper solution. B. Conclusions While leasing is not a cure-all form of financing for distressed businesses, it can be a more economical way of financing an asset. The primary conclusion of this analysis is that the financing decision can- not be based on a single criteria (i.e., tax rate). Every variable relevant to the analysis must be included and its after-tax cost accu- rately determined and identified with either the lease or purchase option. There has always been a misconception that a buy and lease decision can be based entirely on tax liability. Tax liability has a significant effect, but there are other costs, such as opportunity cost, which are relevant and can just as easily alter the decision. For example, refer- ring back to Figure A.1, let's assume an individual has all of the assumptions stated in this analysis and is consistent with this figure. If you assume the individual has 0 percent tax liability, the BREAK- EVEN lease payments which equate the buy and lease options are the following for each level of opportunity cost: 116 Opportunity Cost (%) Annual Lease Payment 5% $3,991 10% 4,141 15% 4,291 The change in lease payment that the individual should pay as a maximum amount varies by $300 annually per $10,000 investment as the opportunity cost increases from 5 to 15 percent. If the individual assumed a 5 percent opportunity cost, when in actuality he or she could have invested those funds for 15 percent, depending on the value of the quoted lease payment, it is very possible the wrong decision could be made. Thus the consequences of failing to incorporate all relevant costs are obvious. The opportunity cost applied to the down payment brings up another point. For an individual who is cash drained, leasing may be the only feasible alternative even if it is not the most economical. In many instances leasing can provide 100 percent financing, and many of the contract costs associated with the agreement can be included directly into the lease payments. The only time this should be considered an advantage to leasing is when the desired asset is classified as a neces- sity. If the asset is purely a need or want, the investment should be postponed until the most economical form of financing can take place. Still many investors remain confused over the determination of the proper financing alternative. It is hoped that this text has facili- tated the decision and can act as a guide in detenmining all relevant variables to incorporate into the analysis and yield the least-costly alternative. 117 1. Need for Individual Analysis It can be seen that there is no easy, set answer to the question of whether to lease or buy. Selecting the least-costly method of financing an asset involves an in-depth analysis for each desired asset. This has been mentioned over and over again in almost every chapter of this thesis. It is perhaps the most important conclusion of this study. No two investment decisions will ever be identical. They vary from investor to investor and from asset to asset. Each investment should be analyzed separately using the techniques discussed in this text. Although the majority of the considerations have already been discussed in pre- vious chapters, the more important factors are summarized in outline fonn. below. In considering whether to lease: 1) Determine whether asset is a necessity, need or want 2) Estimate current and future tax liability 3) Determine all relevant cashflows for the financing alternatives 4) Consider any qualitative factors which may influence the decision 5) Determine the desired rate of return on the investment 6) Evaluate the options using Net Present Value techniques 7) Choose the least-costly alternative C. Need for Further Research If the objective of "Safe Harbor" leasing is to encourage investment by companies with low earnings and those in distressed industries, a recent survey conducted by Arthur Andersen and Company is an indicator 118 it is working.1 They surveyed 42 buyers and sellers of tax benefits and found that the majority of companies that sold tax benefits could not use those benefits currently, either because of depressed conditions or other factors. This factor alone presents a need for further research. An analysis of the "Safe Harbor" guidelines and the macro-effect they have had on stimulating investment is one area unexplored in this text. Another need is that no two financing decisions are identical. This analysis makes a lot of assumptions and evaluates a very limited capital investment horizon. Further conclusions could be reached with the adop- tion of more case examples depicting varying circumstances. A third area for further research is what effect the transfer of tax benefits through "Phantom Sale-Leaseback" agreements has on the lessee's rental payments. This analysis assumed that any transfer of tax benefits from the lessor to a third party was irrelevant. The fourth, and most important reason for further research, is the speculation about the consequences of repealing or restricting the "Safe Harbor“ provisions. The majority of the proposed changes seem to be directed towards the larger, more profitable corporations which have substantially benefited. Some of the changes are: ‘1) Buyers of tax benefits could not reduce more than 50 percent of a year's taxes from these benefits, and must bar appli- cation of transactions to prior-year taxes. 2) Sellers of tax credits would be limited to having "Safe Harbor" leases covering about 45 percent of their new property each year, declining to 40 percent in 1984. 3) "Safe Harbor" leasing would end in 1985 unless renewed by Congress. 4) Having a minimum corporate tax, so-called "mini-tax." 1Arthur Andersen & Company, "Report on Survey of Selected Partici- pants in Safe Harbor Lease Transactions," Washington, D.C.: Office of Federal Services, 1982. ID) 119 Increasing the "at risk" rule from 10 to 20 percent. Lower the amount of money a purchaser of tax benefits would be inclined to pay for them. Shorten the length of leases. Spread out ITC over a three-year period. Stretch out ACRS deductions and calculate them on a leaner straight-line basis. Subtract one-half of the value of ITC from the value of the asset prior to calculating ACRS deductions. There is no way to determine what the final ruling for "Safe Harbor" guidelines will be. As long as Congress and the Administration do not eliminate the provisions completely, this analysis will still be valid. However, once the changes are made they should be incorporated into this analysis, and the case examples should be regenerated to consider any such changes. bin-1- APPENDIX 120 . nu oho ecu Chem A s was" cmnu ocoe on uncmo. A11 .mn z Ax A. A As. oumz wa mEoucH tumum a .mcwumu nocAnEou ms» u-cm. saw Chou .>.nwmu~ mu u 3 A. A A». nomad—mm .mqumu ochcoz momco>< 0:» no new. . mu .10 as“ oboe u . mnA zmz» meat m.m h.z¢u- bx...a m .. A voAcao .mc. ccm1a «. u c" newm> A0 awn.eq.z or» cornm- a 1n.“ nus-r . n2 .- A vocamuoo on ou ouA>can co pound may mo memz ecu coucm. ADdZH mqu u w/ ..11 «whzm any 1maza~w - zomhumm .hDazn 70~k<£mou7u Anvfinz.. A¢.¢uvw>. A¢dvl (01. 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Wave nan amu¢ nrm4 fiwna ”Inc 045: 2....4 NJna mrn¢ nuke 23+: uwaq nunq wage mmqq “40¢ Hu£a nu¢q GHJ¢ 130 ranhum ~+xux enqu afiun chow n..wo4uma4 zmx» "u. u” semn zmx» nnLoJ um sfiwn chow . .nfizd+x.muzwmmn uqu mun nrya soda choc . mun“24 zmxp a" u 0&4 scan chow w num_zq aux» n u om; mm ouwn amwn nuun ovum n.1, :1. u w mnwm onfin Ommw mqgm umwn 131 List of General Information for truck Asset Name = truck 8 Number of Years Working Capital 8 '0 Income Tax Rate 10 2 Option selected is BUY VERSUS LEASE List of truck BUY Option Information Initial Cost of Asset = 3 10000_ ACRS Propertv Class = 3 Years Depreciation Method -Accelerated Cost Recoverv Svstem Include Investment Tax Credits -- Y Percent Debt Financed = 70 2 Debt Retirement Period = 3 Years Debt Interest Rate = 15 2 Down Pavment Opportunitv Cost Rate = 10 Z’ - Asset Useful Life = 8 Years Resale Value = 5 2060 132 List of truck LEASE Option Information INITIAL LEASE DEPOSIT PAYMENT = S 0 Interest on Initial Deposit Pavment= 10 2 Interest Rate for Opportunity Cost 3 10 Z Lease Pavment Amount = t 4000 Total Number of Lease Pavments = ' 3 Frequencv of Lease Paument is ANNUAL Lease PaYments at the Beginning-of-the-Period - N Useful Life of Asset= 8 Years ~ Resale Value= s 2000 ' Terminal Buvout Option Price = $ 1000 3 ACRS Propertv Class Accelerated Cost Recoverv Svstem Depreciation Method 133 ' Initial Balance Sheet for truck Assets Working Capital 0 truck 10.000 Total 109000 Liabilities and Eauitv Long-Term Debt 79000 Net North 3.000 Depreciation and Anticipated Debt Retirement Schedule REMAINING DEBT , PRINCIPAL YEAR DEPRECIATION BOOK VALUE PAYMENT OUTSTANDING 1 2500 7500 2016 4984 2 3800 3700 2318 2666 3 3700 0 2666 0 .4 0 0 0 0 5 0 0 0 . 0 6 0 0 0 0 7 0 0 0 0 8 0 0 0 0 Net AfteréTax Cash Drain Calculations Year Operating Costs Depreciation Interest Income Interest on Debt Taxable Income Deductions Income Tax at 10% Invest. Tax Credit After-Tax Costs Depreciation Opportunitv Cost‘ After-Tax Cash Drain Debt Retirement Equitv Reinvestment Net After-Tax Cash Drain Year Operating Costs Depreciation Interest Income Interest on Debt Taxable Income Deductions Income Tax at 102 Invest. Tax Credit After-Tax Costs Depreciation Opportunitv Cost After-Tax Cash Drain Debt Retirement Equitv Reinvestment Net After-Tax Cash Drain 134 for truck - BUY OPTION 2 3 4 5 0 0 0 0 3800 3700 0 .0 0 0 0 0 748 400' 0 0 4548 4100 0 0 455 410 0 0 0 0 0 0 4093 3690 0 0 -3B00 -3700 0 0 300 300 0 0 593 290 0 0 2318 2666 0 0 0 0 0 0 2911 2956 0 0 7 B 9 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -1800 0 0 0 -1B00 0 0 135 Net After-Tax Cash Drain Calculations for truck - LEASE OPTION Securitv Deposit of s 0 Year 1 2 3 4 5 Operating Costs 0 0 0 0 0 Lease/ Depreciation 4000 4000 4000 250 380 Interest Income . 0 0 0 0 0 Interest on Debt 0 0 0 0 0 Taxable Income 4000 4000 4000 250 380 Deductions Income Tax at 10% 400 400 400 25 38 Invest. Tax Credit 0 0 0 0 0 After-Tax Costs 3600 3600 3600 225 342 Depreciation 0 0 0 -250 -380 Opportunitv Cost 0 0 0 0 0 After-Tax Cash Drain 3600 3600 3600 -25 ~38 Debt Retirement 0 0 0 0 0 Equitv Reinvestment 0 0 1000 0 0 Net After-Tax Cash 3600 3600 4600 -25 -38 Drain - Year 6 7 8 9 - 10 Operating Costs 0 0 0 0 0 Lease/ Depreciation 370 0 0 0 0 Interest Income 0 0 0 0 0 Interest on Debt 0 0 0 0 0 Taxable Income 370 0 0 0 0 Deductions Income Tax at 10% 37 0 0 0 0 Invest. Tax Credit 0 0 0 0 0 AfteréTax Costs 333 o a d o Depreciation -370 0 0 0 0 Opportunitv Cost 0 0 0 0 0 After-Tax Cash Drain -37 0 0 0 0 Debt Retirement 0 0 0 0 0 Eauitv Reinvestment 0 0 -1800 0 0 Net After-Tax Cash -37 0 -1800 0 0 Drain 136 Capital Expenditure Analvsis for truck Lease Pavment of 3 4127.5 INTEREST PEC BUY PEC LEASE AEC BUY AEC LEASE PEC AEC Rate RESIDUAL RESIDUAL 0 9478 10244 1185 1281 ~766 .-96 2 9411 10029 1285 1369 ~618 ~84 4 9322 9801 1385 1456 -479 ~71 6 9218 9566 1484 1540 ~348 ~56 8 9102 9327 1584 1623 ~225 ~39' 10 8979 9088 1683 1704 ~109 ~21 12 8850 8851 1782 1782 ~1 ~0 14 8719 8617 1880 1858 102 22 16 8586 8387 1977 1931 199 46 18 8454 8163 2073 2002 290 71 20 8323 7945 2169 2071 377 98 25 8003 7429 2404 2232 574 173 30 7702 6954 2633 2378 748 256 40 7163 6126 3073 2629 1036 445 PEC RESIDUA L PEC BUY ~ PEC LEASE AEC RESIDUAL AEC BUY ~ AEC LEASE Capital Expenditure Analvsis for truck PEC RESIDUAL AEC RESIDUAL PEC BUY ~ PEC LEASE AEC BUY ~ AEC LEASE INTEREST PEC BUY PEC LEASE AEC BUY AEC LEASE PEC AEC Rate RESIDUAL RESIDUAL 0 9478 9900 1185 1238 ~422 ~53 2 9411 9698 1285 1324 ~287 ~39 4 9322 9482 1385 1408 ~160 ~24 6 218 9259 1484 1491 ~41 -7 8 9102 9031 1584 1572 71 12 10 8979 8803 1683 1650 176 33 12 8850 8575 1782 1726 275 55 14 8719 8350 1880 1800 368 79 16 8586 8130 1977 1872 457 105 18 8454 7914 2073 1941 540 132 20 8323 7704 2169 2008 619 161 25 8003, 7205 2404 2164 798 240, 30 7702 6746 2633 2307 956 327 40 7163 .5944 3073 2550 1218 523 137 List of General Asset Name = Number of Years Working Capital Income Tax Rate Option selected List of TRACTOR Initial Cost of ACRS Propertv Class = Depreciation Method Information for TRACTOR TRACTOR = 12 = . 0 = 10 Z BUY VERSUS LEASE is BUY Option Information Asset = S 50000 5 Years ~Accelerated Cost Recoverv Svstem Include Investment Tax Credits ~~ Y Percent Debt Financed = Debt Retirement Debt Interest Rate = Down Pavment Opportunitv Cost Rate = Asset Useful Life = Resale Value = 70 2 Period = 5 Years 15 2 10 2 12 Years S 10000 138 List of TRACTOR LEASE Option Information INITIAL LEASE DEPOSIT PAYMENT = s 0 Interest on Initial Deposit Pavment= 10 2 Interest Rate for Opportunitv Cost = 10 Z Lease PaYment Amount = S 14000 Total Number of Lease Paxments = ' 5 Freauencv of Lease Paument is ANNUAL Lease Pavments at the BeginninQ-of~the~Period ~ N Useful Life of Asset= 12 vears Resale Value= S 10000 Terminal Buvout Option Price = $ 5000 ACRS Propertv Class 5 Accelerated Cost RecoverY Svstem Depreciation Method 139 Initial Balance Sheet for TRACTOR Assets Horking Capital 0 TRACTOR 509000 Total 509000 Liabilities and Equitv Long-Term Debt 359000 Net North 159000 Depreciation and Anticipated Debt Retirement Schedule REMAINING DEBT PRINCIPAL YEAR DEPRECIATION BOOK VALUE PAYMENT OUTSTANDING 1 7500 42500 5191 29809 2 11000 31500 5970 23839 3 10500 21000 6865 16974 4 10500 10500 7895 9079 5 10500 0 9079 0 6 0 0 0 0 7 0 0 0 0 8 0 0 0 0 9 0 0 0 0 10 0 0 0 0 11 0 0 0 0 12 0 0 0 0 140 Net After-Tax Cash Drain Calculations for TRACTOR - Yeil‘ Operating Costs Depreciation Interest Income Interest on Debt Taxable Income Deductions Income Tax at 10% Invest. Tax Credit After-Tax Costs Depreciation Opportunitv Cost After-Tax Cash Drain Debt Retirement Equitv Reinvestment Net After-Tax Cash Drain Year Operating Costs Depreciation Interest Income Interest on Debt Taxable Income Deductions Income.Tax at 10% Invest. Tax Credit After-Tax Costs' Depreciation Opportunitv Cost After-Tax Cash Drain Debt Retirement Equitv Reinvestment Net After-Tax Cash Drain BUY OPTION 1 2 3 4 5. . 0 0 0 0 0 7500 11000 10500 10500 10500 0 0 0 0 0 5250 4471 3576 2546 1362 12750 15471 14076 13046 11862 1275 1547 1408 1305 1186 5000 0 0 0 0 6475 13924 12668 11742 10676 -7500 -11000 -10500 ,-10500 ~10500 1500 1500 1500 1500 1500 475 4424 3668 2742 1676 5191 5970 6865 7895 9079 0 , a 0 0 0 5666 10394 10533 10636 10755 6 7 8 9 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 40 0 0 0 0 0 0 0 , 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~1800 0 0, 0 0 ~1800 0 ’ 0 Year Operating Costs Depreciation Interest Income Interest on Debt Taxable Income Deductions Income Tax at 10% Invest. Tax Credit After-Tax Costs Depreciation Opportunitv Cost After-Tax Cash DPain Debt Retirement Eauitv Reinvestment Net After-Tax Cash Drain 141 11 12 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~9000 0 ~9000 13 14 15 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 i 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Net After-Tax Cash Drain Calculations Securitv Deposit of s 0 Year Operating Costs Lease/ Depreciation Interest Income Interest on Debt Taxable Income Deductions Income Tax at 10% Invest. Tax Credit After-Tax Costs Depreciation Opportunitv Cost After-Tax Cash Drain Debt Retirement ' Eeuitv Reinvestment Net After-Tax Cash Drain Year Operating Costs Lease/ Depreciation Interest Income Interest on Debt Taxable Income Deductions Income Tax at 10% Invest. Tax Credit After-Tax Costs Depreciation Opportunitv Cost After-Tax Cash Drain Debt Retirement Equitv Reinvestment Net After-Tax Cash Drain 142 for TRACTOR — LEASE OPTION 1 2 3 4 5- 0 0 0 0 0 14000 14000 14000 14000 14000 0 0 0 0 0 0 0 0 0 0 14000 14000 14000 14000 14000 1400 1400 1400 1400 1400 0 0 0 0 0 12600 12600 12600 12600 12600 0 0 0 0 0 0 0 0 0 0 12600 12600 12600 12600 12600 0 0 0 0 0 0 0 0 0 5000 12600 12600 12600 12600 17600 6 7 8 9 10 0 0 0 0 0 750 1100 1050 1050 1050 0 0 0 0 0 0 0 0 0 0 750 1100 1050 1050 1050 75 110 105 105 105 0 0 0 0 0 675 990 945 945 945 ~750 ~1100 ~1050 ~1050 ~1050 0 0 0 0 0 ~75 ~110 ~105 ~105 ~105 0 0 0 0 0 0 0 0 0' 0 ~75 ~110 '~105 ~105 ~105 Year Operating Costs Lease/ Depreciation Interest Income Interest on Debt Taxable Income Deductions Income Tax at 10% Invest. Tax Credit After-Tax Costs Depreciation Opportunitv Cost After-Tax Cash Drain Debt Retirement Equitv Reinvestment Net After-Tax Cash Drain 143 11 12 13 14 15 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 a 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0 -9000 0 0 0 0 -9000 0 0 0 144 Capital Expenditure Analvsis for TRACTOR Lease Pavment of $ 13975.9 PEC RESIDUAL AEC RESIDUAL INTEREST Rate PEC RESIDUAL AEC RESIDUAL PEC BUY ~ PEC LEASE AEC BUY ~ AEC LEASE Capital Expenditure Analvsis for TRACTOR PEC BUY 52185 51406 50417 49300 48110 46890 45668 44462 43287 42151 41059. 38538 36317 32677 PEC LEASE 58500 56396 54217 52027 49868 47768 45745 43810 41967 40219 38564 34819 31585 26378 AEC BUY 4349 4861 5372 5880 6384 6882 7372 7855 8329 8794 9249 10346 11384 13305 PEC BUY ~ PEC LEASE AEC BUY ~ AEC LEASE AEC LEASE 4875 5333 5777 6206 6617 7011 7385 7740 8075 8391 8687 9347 9900 10741 PEC RESIDUAL ~6315 ~4990 ~3800 ~2727 ~1757 ~878 ~78 652 1320 1932 2495 3719 4732 6299 INTEREST PEC BUY PEC LEASE AEC BUY AEC LEASE PEC AEC Rate RESIDUAL RESIDUAL 0 52185 58392 4349 4866 ~6207 ~517 2 51406 56294 4861 5323 ~4888 ~462 4 50417 54121 5372 5767 ~3703 ~395 6 49300 51935 5880 6195 ~2636 ~314 8 48110 49781 6384 6606 ~1671 ~222 10 46890 47686 6882 6999 ~796 ~117 12 45668 45667 7372 7372 0 0 14 44462 43736 7855 7727 726 128 16 43287 41896 8329 8061 1391 268 18 42151 40151 8794 8377 2000 417 20 41059 38499 9249 8673 2560 577 25- 38538 34761 10346 9331 3778 1014 30 36317 31532 11384 . 9884 4785 1500 40 32677 26334 13305 10723 6343 2583 AEC RESIDUAL ~526 ~472 ~405 ~325 ~233 ~129 ~13 115 254 403 562- 998 1423 2565 BIBLIOGRAPHY BIBLIOGRAPHY Aplin, Richard 0., George L. Casler, and Cheryl P. Francis, Ca ital Investment Analysis Usinngiscounted Cash Flows, Columbus: Gr1d, Ific., 1977. Archer, Stephen N., G. M. Choate,and George Racette, Financial Man- agement, New York: John Riley and Sons, Inc., 1979. Arthur Andersen & Company, Report on Survey of Selected Participants in Safe Harbor Lease Transactions, Washington, D.C.: Office of Federal Services, 1982. Castle, Emery N., Manning H. Becker, and Frederick J. Smith, Farm Business Management, London: Macmillan Publishers, 1972. Cooney, Gerald G., The Management and Operation of a Bank Affiliated Leasing_Company, Boston: Financial Publishing Company, 1971. Davey, Patrick J. ,Report on Leasing: E_periences and Expectations, New York: Conference Board, 1980. Davidson, Mark E., "Survey of Current Agricultural Lending Procedures and Policies for a Select Group of Institutional Lenders," East Lansing: Michigan State University, 1982. Federal Reserve Bank of Kansas City, Economic Review, (Kansas City: Federal Reserve Bank of Kansas City, June 1981). Monitoring Lease Financing in Agriculture, by Ann L. Adair, John B. Penson, and Marvin Duncan. Harsh, Stephen 8., Larry J. Connor, and Gerald D. Schwab, Managing the Farm Business, Englewood Cliffs: Prentice-Hall, Inc., 1981. Kelsey, Myron P., Staff Paper on Summary of Economic Recovery Act of 1981 Special Concerns for Farmers, East Lansing:7Michigan State University, 1982, No. 81-62. Lee, Warren F., M. D. Boehlje, A. G. Nelson and N. G. Murray, Agricul- tural Finance, Ames: The Iowa State University Press, 1980. Penson, John B. Jr. , Danny A. Klinefelter, and David A. Lins, Farm Investment and Financial Analysis, Englewood Cliffs: Prentice- Hall, Inc., 1982. 145 146 Prentice-Hall, Inc., Concise Explanation of the Economic Recovery_Tax Act of 1981, Englewood Cliffs: Prentice-Hall, Inc., 1981. Pritchard, Robert E. and Thomas J. Hindelang, The Lease/Buy Decision, New York: Amacom, 1980. Schwab, Gerry and Ralph Hepp, Staff Paper on Leasing of Specialized Agricultural Facilities Machinery and Breeding_Livestock, East Lansing: Michigan State University, 1982, No. 81-62. Stevens, G. T. Jr., Economic and Financial Analysis of Capital Invest- ments, New York: Wiley, 1979. Texas Agricultural Experiment Station, Farmer's and Rancher's Guide to Borrowing Money, College Station: Texas Agricultural Experi- ment Station, October 1981. Van Horne, James C., Financial Management and Policy, Englewood Cliffs: Prentice-Hall, Inc., 1974. Weston, Fred J. and Eugene F. Brigham, Managerial Finance, Illinois: Dryden Press, 1981.