Submitted by: Submitted by csunorch11
Views: 2523
Words: 1895
Pages: 8
Category: Business and Industry
Date Submitted: 11/10/2010 04:45 PM
Primus Automation Division
Issue
The issue is this case is determining whether Primus should lease or capital lease its equipment to customers and determining the financing rates, while Primus’s sales continue to increase 15% annually.
Interpretation
Primus Automation is an innovative producer of world-class factory automation products and services with operations in the United States, Europe, and Asia. Some of the products it consists of are programmable controllers, numerical controllers, among others. The objectives of this company are to maintain leadership in market share, increase sales by 15% a year, and to achieve its target for net income and working capital turnover. In the other hand, Avantjet is a manufacturer of corporate-jet aircraft. Avantjet is trying to acquire an automation system that will cut costs and accelerate the company’s production line. For this company, what needs to be considered is their capital intensive, the fact that they are highly levered, and the fact that the CEO ordered a moratorium on any capital expenditures that will negatively affect the income statement and balance sheet.
Therefore, Avantjet’s financial situation is whether they should obtain funds by borrowing funds, obtain the equipment through a conditional sale, with title being received upon receipt of the final payment, or through leasing the equipment by either a capital lease or an operating lease. The way a lease should be evaluated by the lessee is if it would be cheaper than buying it and what company offers a better rate. As a lessor, what they consider is if the lease payments will give an acceptable return on the capital invested in the leased asset.
Analysis and Evaluation
The following are the differences between a capital lease and an operating lease. A capital lease spans the entire life of the asset and there is no cancelation clause. The lessee retains ownership and is exposed to the risk of early changes in the assets value and is...