Primus Automation<br /> Innovative producer of world-class factory-automation products and services with operations in the United States, Europe, and Asia.<br />Products:<br />Programmable controllers<br />Numerical controllers<br />Industrial computers<br />Manufacturing software<br />Factory-automation systems<br />Data communication networks<br />Objectives:<br />Maintain leadership in market share<br />Increase sales by 15% a year<br />Achieve its targets for net income and working capital turnover<br />
Avantjet<br /> Manufacturer of corporate-jet aircraft. Avantjet is trying to acquire an automation system that will cut costs and accelerate the company’s production line. <br /> Some things to note:<br /><ul><li>Capital Intensive
CEO ordered a moratorium on any capital expenditures that will negatively affect the income statement and balance sheet</li></li></ul><li>Financial Situation<br />In order for Avantjet to acquire the automation system they could:<br />Acquire funds through borrowed funds<br />Acquire the equipment through a conditional sale – title passes to the firm upon receipt of the final payment<br />Lease the equipment in two ways:<br />Capital Lease<br />Operating Lease<br />
Lease Characteristics<br /><ul><li>A lease is a rental agreement that involves a series of fixed payments that extend over several periods.
Lessee acquires the asset’s productive value from the lessor, but relinquishes the residual value.
Residual Value- what the asset is worth at the end of the lease</li></li></ul><li>Lease Evaluation<br />By the lessee<br />Is leasing the asset less costly than buying it?<br />What company will offer the best leasing terms?<br />By the lessor<br />Will the lease payments provide a satisfactory return on the capital invested in the leased asset? <br />
Capital Lease<br />Spans the entire life of the asset, no cancellation clause<br />Lessee retains ownership of the equipment and is exposed to the risk of early changes in the asset’s value<br />Lessee is required to depreciate the equipment by showing it as an asset and liability on their balance sheet<br />Not able to deduct the lease payment from income taxes<br />
Operating Lease<br />Cancellation clause<br />Technological obsolescence<br />Automation system would not appear on Avantjet’s balance sheet and at the end of the lease term, the equipment would revert back to Primus Automation<br />Not fully amortized<br />Lessee discount<br />Lessor can renew, re-lease, or sell<br />Lease payments are treated as an ordinary expense, deductible from taxable income<br />
AvantJet’s Net Advantage of Leasing over Borrowing<br /> Option 1<br /> Option 2<br />
AvantJet’s Net Advantage of Leasing over Borrowing<br /> Option 3<br /> Option 4<br />
Primus Vs.FaulhaberGmbh<br /> Option 3<br /> Option 4<br />
Primus Vs.Honshu Heavy Industries<br /> Option 3<br /> Option 4<br />
Decision Summary<br />Pick Option 3<br />Operating lease<br />Option 1 and 2 do not give Primus a positive NPV<br />Option 3 and 4 give Primus a positive NPV <br />However, with option 4 there would not be a net advantage to leasing between Primus and Honshu Heavy Industries, so we would risk potentially losing this business. <br />
THIS IS OUR STORY …AND WE’RE STICKING TO IT!<br />