Question

You are a staff accountant at a higher education institution, Philly College of Business (“the College” or PCB). The lease on the current multifunction copiers the College uses is almost up. The college has decided to replace the current copiers with Canon imageRunner AdvanceC55501 copiers. The following is the information you have been able to gather so far related to renting the copiers. The IT department was able to negotiate the following lease terms to rent the 15 copiers needed.

• The lease is non-cancelable

• 5-year lease term (estimated economic life is also 5-years)

• The local Canon dealer is responsible for all repairs and maintenance on the copiers during the lease term.

• The base rent per copier is $146.93/month. There is an additional charge of $0.0068 per page copied or printed per month.

• The IT department estimates that the College will average 10,000 to 20,000 copies per month per copier.

• The current fair market value of the copiers is $9,190 per copier.

• The copiers will be returned to the local Canon dealer when the lease term is over.

• The unguaranteed residual value is estimated to be $900 at the end of the lease.

Question

The CFO has asked you to prepare an analysis including supporting calculations on the impact to the balance sheet and income statement in each of the next 6 years of a second option related to the copiers - leasing the imageRunner AdvanceC55501copiers. In addition, the CFO would like you to compare the two options (purchase copiers with cash on hand and lease copiers). Your analysis for the CFO should be in the form of a 1-2 page memo plus supporting tables. Assume the lease term on the copiers begins October 31, 2018. At a minimum your supporting tables should include the following. You may also want to include some or all of your tables from part 1 of the project.

a. Lease amortization table (if you determine this would be a finance lease)

b. A schedule of the journal entries for each of the next 6 years, 2018 – 2023 related to the lease

c. A table summarizing the balance sheet and income statement impact in each of the six years (for both options)

d. A table calculating and comparing the present value of the net cash flows for each of the options: purchase with cash on hand and lease the copiers.

Assume the incremental borrowing rate is 6.1%

Answer 1

Answer:                                              MEMO

To,

           The CFO,

           Philly College of Business,

          SUB- Recommendation of Option - Lease Agreement or Purchase of Canon image Runner AdvanceC55501 copiers

Dear Sir,

I have done working on identifying the suitable option , company should select is Leasing option

On the basis of my recommendation , The option .2 36291.53. is beneficial to the company

Working :

Option 1-   Purchase with cash on hand

Estimated Purchase value = $ 9190 Each machine

Total purchase value for 15 machine = $ 9191 X 15

                                                    = $ 137850

Estimated un-guaranteed residual value = $ 900

Estimated useful life- 5 year

Depreciation on straight line basis : $ 137850- $ 900     = $ 27390

                                                                5

Borrowing Rate = 6.1 %

Year	Repayment $ (A)	Interest $ (B)	Tax savings $ (C)	Depreciation $ (D)	Tax Savings $ (E)	NCF $ (A+C+E)
1	27570	8408.85	2522.65	27390	8217	38309.65
2	27570	6727.08	2018.12	27390	8217	37805.12
3	27570	5045.31	1513.59	27390	8217	37300.90
4	27570	3363.54	1009.06	27390	8217	36796.06
5	27570	1681.77	504.53	27390	8217	36291.53

Option 2 : lease the copiers

Estimated Rent Per Machine : $ 146.93 X 12 = 1763.16 Per month

Rent for 15 Machine per month : $ 26447.40

Present Value of the NCF of the two options are shown below.

	Lease			purchase
Year	NCF	P. V@ 6.10%	Year	NCF	P.V@ 6.10
1	38309.65	35340.5	1	26447.4	24397.2
2	37805.12	33582.28	2	26447.4	23493.22
3	37300.90	31228.31	3	26447.4	22141.76
4	36796.06	29035.21	4	26447.4	20869.64
5	36291.53	26990.01	5	26447.4	19668.93