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week 4 lease vs. buy paper - Analyzing Lease vs Buy...

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Analyzing Lease vs. Buy Decisions Simulation Summary 1 Analyzing Lease vs. Buy Decisions” Simulation Summary Christopher Wall University of Phoenix FINANCIAL ANALYSIS FOR MANAGERS II/FIN 325 James (Jim) J. Hellmich March 17, 2008
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Analyzing Lease vs. Buy Decisions Simulation Summary 2 SCENARIO 1: Bonnesante Research is a start up business in Irvine, California focusing on biotech, and is based on 30 employees. As it grows, company’s asset acquisition needs to be focused. Bonnesante needs to submit its first drug to Food and Drug Administration within six months. In order to run advanced analytical software for the preparation of the drug, it needs to acquire mainframe computer. Now the decision needs to be taken to either lease or buy the mainframe computer. SOLUTION 1: As a CFO of Bonnesante Research company, by taking my colleagues opinion into consideration, I have decided to lease the mainframe computer for 18 months instead of buying it. The reason being is that the loan options were proposing significantly higher outflows and the leasing option of 18 month with no money down proposed the lowest present value of the cash outflows of the duration. Since Bonnesante is not a profitable company due to this reason the expenses for buying an asset will not be tax deductible, and loaning option will also require to record the transaction and corresponding liability on the balance sheet. But through the operating lease option, an asset will not need to be reported on balance sheet. Moreover, the technology can be outdated in the future and there could be a need of upgrading it. Due to all those reason, operating lease is the best option that a company has at this moment. SCENARIO 2: Another scenario is that the Bonnesante requires an advanced spectrometer for its Research and Development program. The cost of this spectrometer is $2,000,000 but
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Analyzing Lease vs. Buy Decisions Simulation Summary 3 Bonnesante is now operating as a profitable firm. The options are to do a short term
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