Primus Case Study

FINANCE 419 Name: ___Curtis Miller __________

CASE 39 – Primus Homework Questions

1. How did Tom Baumann analyze the problem of setting the lease-financing terms? How does he calculate NPV and internal rate of return (IRR) for the lease and borrow-and-buy alternatives? Please complete case Exhibit 6.

a. Baumann compares the 4 lease options using a sensitivity analysis. By creating a model that connects all four options of leasing as well as the loan situation, he can determine the most attractive scenario from both the lessor and lessee positions. He simply determines the cash outflows for each case and then values them at present. Calculating IRR is similar, except he calculates the lease payments less the incremental cash flow.

2. How are Faulhaber and Honshu Heavy Industries using their leasing plans?

b. Because the numbers for almost all scenarios are so unattractive, it looks like Faulhaber and Honshu are both using their leasing plans to make the purchasing option look more attractive. In all cases for both companies, either there is a very high NPV, which is unattractive to a buyer, or there is a strong financial disadvantage to leasing over buying. When presented with these numbers, a customer would be likely to consider buying rather than leasing.

3. What lease terms should Baumann recommend? How should Primus’s sales and leasing divisions structure the terms of the deal with Avantjet?

c. The best option is option 3. Primus achieves a strong net present value, and the numbers are more attractive than buying for AvantJet. Option 4 provides similar numbers, but there is little differentiation from the numbers that are generated by Honshu. As the manager said, they need to meet their sales quota, so they should do what they can to beat out the competition.