Caledonia Products Company is introducing a new product

Caledonia Products Company is introducing a new product -...

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As an assistant financial analyst it is my job to take into account the interest to calculate payback period, net present value and internal rate of return of project A and Project B and to monitor which project is more tangible than other. As we have read in the text book that “There are times when it might be advantageous to lease an asset, even when the NPV for its purchase is negative. The cost savings of a lease may more than offset the negative NPV of purchase.” The most important factor to consider is the net advantage of leasing. With the NAL (net advantage of leasing) we need to compare the present value of the lease option and the net present value of purchasing. Analyzing the net advantage of leasing we have to calculate the net present value of the lease option and have to compare it with the NPV
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Unformatted text preview: of purchasing option. By analyzing both if we found that net advantage of leasing is positive we will prefer leasing over purchasing and if leasing net advantage is negative purchase option will be preferred. Therefore Caledonia should consider the net advantage of leasing and should compare the expenses and revenues associated with each option; For example under purchasing option firm can sell the equipment at the end of project and can receive cash inflow which will not be available in leasing option Yet at the same time under the purchase option Caledonia does not have to make the initial capital outlay. Another important factor to consider is that under purchase option operating expenses will be incurred while such expenses would not be incurred under the leasing option....
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