Assignment - Case Study: America Coffee House
Purpose - Under this case approach, you will demonstrate your ability to undertake a detailed analysis to evaluate the buy versus lease options for an investment proposal, on a qualitative and quantitative basis. You will also be required to calculate the weighted average cost of capital (WACC). A supplementary scenario analysis of leasing options is required.
ORDER NEW AMERICA COFFEE HOUSE CASE STUDY ASSIGNMENT AT NOMINAL PRICE!
Topic: Case Study American Coffee House
Question - Explain the advantages and disadvantages of leasing, including the possible reasons, right or wrong, that would make a company lease an asset (from the lessor and lessee perspective).
Answer: - Pros and Cons of Leasing
(A) The Cons can be listed as below:
- The company losses the allowance and the benefit claimed under the capital benefit.
- The lease can be a massive costly aspect as compared to the purchase's prospects.
(B) The Pros can be listed as below:
- Liquidity is appropriately maintained as the payments are not blocked for a long-time goal.
- Optimal Utilization of the assets as well as improves efficiency and effectiveness of the assets.
Reasons for Lessor to lease the assets
- Property is named after the lessor.
- Regular interval of rental agreements is received.
- Lessor has the selling rights
Reasons for Lessee to lease the assets
- Tax benefit can be received easily.
- Cash Management can be managed and planned.
- Maximum utilization of the assets can be achieved without making huge investments
GET BENEFITTED WITH QUALITY AMERICA COFFEE HOUSE CASE STUDY ASSIGNMENT HELP SERVICE OF EXPERTSMINDS.COM!
Question - Calculate the weighted average cost of capital (WACC) to use in your net advantage to leasing (NAL) analysis, rounding to the nearest one tenth of a percent.
Answer - Estimation of Weighted Cost of Capital
Given information are as follows for the American Coffee House: -
Equity - $ 10 Million common shares
Share price for Equity = $ 30 per share
Growth rate of dividend = $ 3 per share
Preferred share = 1 Million preferred shares
Share price For Preference Share = $ 20 per share
Constant Growth Rate for common dividends = 2 %
Market Value of the debt cost = $ 120 Million
Before Tax Debt Cost = 8 percent
Tax rate = 25 percent
Computing the cost of capital with the help of dividend growth model can be estimated as follows: -
|
Equity cost of capital =
|
By using Dividend growth formula
|
(D1/ Po) + g = (3 / 30) + 0.02
|
|
|
0.12
|
|
Preference cost of capital =
|
By using Dividend growth formula
|
(D1/ Po) + g = (2 / 20 +0.02)
|
|
|
0.17
|
|
Total Capital for the American Coffee House
|
No of shares
|
|
Value In million
|
Weights
|
Computation
|
|
Equity Share
|
1,00,00,000.00
|
$30.00
|
$30,00,00,000.00
|
68.18%
|
Equity Shares / Total Capital
|
|
Preference Shares
|
10,00,000.00
|
$20.00
|
$2,00,00,000.00
|
4.55%
|
Preferences Shares / Total Capital
|
|
Debt Shares
|
12,00,00,000.00
|
$1.00
|
$12,00,00,000.00
|
27.27%
|
Debt Shares / Total Capital
|
|
Total
|
|
|
$44,00,00,000.00
|
100.00%
|
|
|
Cost of Capital
|
Tax Rate
|
After Tax Rate ((Cost of capital* 1-Tax rate))
|
Weights
|
Weighted Cost of Capital (After Tax RATE * Weights)
|
|
Debt
|
8.00%
|
25.00%
|
6.00%
|
68.18%
|
4%
|
|
Equity
|
12.00%
|
1.00%
|
11.88%
|
4.55%
|
1%
|
|
Preference
|
17.00%
|
1.00%
|
16.83%
|
27.27%
|
5%
|
|
Total - Weights
|
37%
|
27%
|
35%
|
100%
|
9%
|
Total Cost of Capital = 9 %
ORDER NEW COPY OF AMERICA COFFEE HOUSE CASE STUDY ASSIGNMENT & GET HIGH QUALITY SOLUTIONS FROM SUBJECT'S TUTORS!
Question - Prepare your Net Advantage to Leasing analysis of the investment using the WACO as the discount rate. In addition, determine the impacts of the sensitivity analysis in the case, including
a. changes in payments from beginning of period to end;
b. changes in salvage value;
c. security deposit; and
d. the break-even lease payment.
Answer: - Net Advantage of Leasing the Investment
Net Advantage to Leasing (NAL Method) analysis helps in computing the details of the investment as follow: -
New Refrigerator equipment = $ 10 Million
CCA Rate = 35 Percent
Lease Equipment for the American Coffee House = $ 2.15 Million
Salvage Value = $ 2.7 Million estimated Value
Salvage Value = $ 1.5 Million expected Value
Term Period Years = Six Years
Applicable Tax Rate = 25 Percent
American Coffee House Security Deposits = $ 800000
Discounting Factor = 9 % as computed from question Number Three.
Analysis: -
|
Computation of Depreciation Table
|
|
|
Years
|
1
|
2
|
3
|
4
|
5
|
6
|
|
|
Cost of Assets (a)
|
$ 1,00,00,000.00
|
$ 65,00,000.00
|
$ 42,25,000.00
|
$ 27,46,250.00
|
$ 17,85,062.50
|
$ 11,60,290.63
|
|
|
Depreciation Each Year CCA @35 % (b)
|
$ 35,00,000.00
|
$ 22,75,000.00
|
$ 14,78,750.00
|
$ 9,61,187.50
|
$ 6,24,771.88
|
$ 4,06,101.72
|
|
|
Value after depreciation c= (a*b)
|
$ 65,00,000.00
|
$ 42,25,000.00
|
$ 27,46,250.00
|
$ 17,85,062.50
|
$ 11,60,290.63
|
$ 7,54,188.91
|
|
|
Tax Savings @ 25% (c*25%)
|
$ 16,25,000.00
|
$ 10,56,250.00
|
$ 6,86,562.50
|
$ 4,46,265.63
|
$ 2,90,072.66
|
$ 1,88,547.23
|
|
|
|
|
|
|
|
|
|
|
In case when the Savage Value = 1.5 Million
|
|
NPV of Purchasing Cost
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Equipment Cost
|
$ 1,00,00,000.00
|
|
|
|
|
|
|
|
Tax Saving of Depreciation
|
$ -
|
$ 16,25,000.00
|
$ 10,56,250.00
|
$ 6,86,562.50
|
$ 4,46,265.63
|
$ 2,90,072.66
|
$ 1,88,547.23
|
|
Salvage Value
|
|
|
|
|
|
|
$ 15,00,000.00
|
|
Annual Inflows Cash Flows (A)
|
$ -1,00,00,000.00
|
$ 16,25,000.00
|
$ 10,56,250.00
|
$ 6,86,562.50
|
$ 4,46,265.63
|
$ 2,90,072.66
|
$ 16,88,547.23
|
|
Discounting Factor @ 9 % (b)
|
1
|
0.917431193
|
0.841679993
|
0.77218348
|
0.708425211
|
0.649931386
|
0.596267327
|
|
A* B
|
$ -1,00,00,000.00
|
$ 14,90,825.69
|
$ 8,89,024.49
|
$ 5,30,152.22
|
$ 3,16,145.82
|
$ 1,88,527.32
|
$ 10,06,825.54
|
|
Net Present Value
|
$ -55,78,498.91
|
|
|
|
|
|
|
|
|
|
|
In case when the Savage Value = 2.7 Million
|
|
NPV of Purchasing Cost
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Equipment Cost
|
$ 1,00,00,000.00
|
|
|
|
|
|
|
|
Tax Saving of Depreciation
|
$ -
|
$ 16,25,000.00
|
$ 10,56,250.00
|
$ 6,86,562.50
|
$ 4,46,265.63
|
$ 2,90,072.66
|
$ 1,88,547.23
|
|
Salvage Value
|
|
|
|
|
|
|
$ 27,00,000.00
|
|
Annual Inflows Cash Flows (A)
|
$ -1,00,00,000.00
|
$ 16,25,000.00
|
$ 10,56,250.00
|
$ 6,86,562.50
|
$ 4,46,265.63
|
$ 2,90,072.66
|
$ 28,88,547.23
|
|
Discounting Factor @ 9 % (b)
|
1
|
0.917431193
|
0.841679993
|
0.77218348
|
0.708425211
|
0.649931386
|
0.596267327
|
|
A* B
|
$ -1,00,00,000.00
|
$ 14,90,825.69
|
$ 8,89,024.49
|
$ 5,30,152.22
|
$ 3,16,145.82
|
$ 1,88,527.32
|
$ 17,22,346.33
|
|
Net Present Value
|
$ -48,62,978.12
|
|
|
|
|
|
|
|
|
|
In case of leasing Option
|
|
NPV of Leasing Cost
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Rental Payments
|
$ -
|
$ 21,50,000.00
|
$ 21,50,000.00
|
$ 21,50,000.00
|
$ 21,50,000.00
|
$ 21,50,000.00
|
$ 21,50,000.00
|
|
Security Deposits
|
$ 8,00,000.00
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
|
Tax Saving on the Rental Expense @ 25%
|
$ -
|
$ 5,37,500.00
|
$ 5,37,500.00
|
$ 5,37,500.00
|
$ 5,37,500.00
|
$ 5,37,500.00
|
$ 5,37,500.00
|
|
Annual Inflows Cash Flows (A)
|
$ -8,00,000.00
|
$ -16,12,500.00
|
$ -16,12,500.00
|
$ -16,12,500.00
|
$ -16,12,500.00
|
$ -16,12,500.00
|
$ -16,12,500.00
|
|
Discounting Factor @ 9 % (b)
|
1
|
0.917431193
|
0.841679993
|
0.77218348
|
0.708425211
|
0.649931386
|
0.596267327
|
|
A* B
|
$ -8,00,000.00
|
$ -14,79,357.80
|
$ -13,57,208.99
|
$ -12,45,145.86
|
$ -11,42,335.65
|
$ -10,48,014.36
|
$ -9,61,481.06
|
|
Net Present Value
|
$ -80,33,543.73
|
SAVE TOP GRADE USING AMERICA COFFEE HOUSE CASE STUDY ASSIGNMENT HELP SERVICE OF EXPERTSMINDS.COM!
On account with Break Even Analysis
(a)
|
In case of leasing Option - In case when the Savage Value = 1.5 Million
|
|
NPV of Leasing Cost
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Rental Payments
|
$ -
|
$ 12,07,600.00
|
$ 12,07,600.00
|
$ 12,07,600.00
|
$ 12,07,600.00
|
$ 12,07,600.00
|
$ 12,07,600.00
|
|
Security Deposits
|
$ 8,00,000.00
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
|
Tax Saving on the Rental Expense @ 25%
|
$ -
|
$ 3,01,900.00
|
$ 3,01,900.00
|
$ 3,01,900.00
|
$ 3,01,900.00
|
$ 3,01,900.00
|
$ 3,01,900.00
|
|
Annual Inflows Cash Flows (A)
|
$ -8,00,000.00
|
$ -9,05,700.00
|
$ -9,05,700.00
|
$ -9,05,700.00
|
$ -9,05,700.00
|
$ -9,05,700.00
|
$ -9,05,700.00
|
|
Discounting Factor @ 9 % (b)
|
1
|
0.917431193
|
0.841679993
|
0.77218348
|
0.708425211
|
0.649931386
|
0.596267327
|
|
A* B
|
$ -8,00,000.00
|
$ -8,30,917.43
|
$ -7,62,309.57
|
$ -6,99,366.58
|
$ -6,41,620.71
|
$ -5,88,642.86
|
$ -5,40,039.32
|
|
Net Present Value
|
$ -48,62,896.47
|
|
Annual Lease Payment
|
$ 12,07,600.00
|
(b)
|
In case of leasing Option - In case when the Salvage Value = 2.7 Million
|
|
NPV of Leasing Cost
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Rental Payments
|
$ -
|
$ 14,20,000.00
|
$ 14,20,000.00
|
$ 14,20,000.00
|
$ 14,20,000.00
|
$ 14,20,000.00
|
$ 14,20,000.00
|
|
Security Deposits
|
$ 8,00,000.00
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
|
Tax Saving on the Rental Expense @ 25%
|
$ -
|
$ 3,55,000.00
|
$ 3,55,000.00
|
$ 3,55,000.00
|
$ 3,55,000.00
|
$ 3,55,000.00
|
$ 3,55,000.00
|
|
Annual Inflows Cash Flows (A)
|
$ -8,00,000.00
|
$ -10,65,000.00
|
$ -10,65,000.00
|
$ -10,65,000.00
|
$ -10,65,000.00
|
$ -10,65,000.00
|
$ -10,65,000.00
|
|
Discounting Factor @ 9 % (b)
|
1
|
0.917431193
|
0.841679993
|
0.77218348
|
0.708425211
|
0.649931386
|
0.596267327
|
|
A* B
|
$ -8,00,000.00
|
$ -9,77,064.22
|
$ -8,96,389.19
|
$ -8,22,375.41
|
$ -7,54,472.85
|
$ -6,92,176.93
|
$ -6,35,024.70
|
|
Net Present Value
|
$ -55,77,503.30
|
|
Annual Lease Payment
|
$ 14,20,000.00
|
DO YOU WANT TO EXCEL IN AMERICA COFFEE HOUSE CASE STUDY ASSIGNMENT - ORDER AT EXPERTSMINDS!
Question - Explain and evaluate if the investment should be purchased or leased, depending on the different scenarios analyzed.
Answer - Recommendations for scenarios
According to above analysis
In case the salvage value is 1.5 million it is appropriate to choose leasing option.
In case the salvage value is 2.7 million it is appropriate to choose purchasing option.
Question - Determine the classification of the lease option being considered, and indicate what the effect would be on the statement of financial position.
Answer - Lease Classification
It classified as a Financial lease as the useful life of assets used in option is 2 /3 of the whole life of the assets. The main effected will be reflected in the balance sheet having an increment in both sides on being the Non-Current Assets and the other being the Non-current Liabilities.
DON'T MISS YOUR CHANCE TO EXCEL IN AMERICA COFFEE HOUSE CASE STUDY ASSIGNMENT! HIRE TUTOR OF EXPERTSMINDS.COM FOR PERFECTLY WRITTEN AMERICA COFFEE HOUSE CASE STUDY ASSIGNMENT SOLUTIONS!