Brazil

interoffice memorandum

to: rob mckenney, VP & treasurer, bnrr

from: Paul Weyandt, director of finance

subject: Lease Vs Purchase decision for addtl capital expenditures

Current Situation:

BNRR must acquire 22M in capital equipment. The question will be how to finance the equipment. BNRR has found that, as of a recent divestiture, the company is highly leveraged, and borrowing capacity is down. Because of this, it might be prudent to take advantage of an operating lease, in order to keep the lease off the financial statements, and work to reduce the debt load. We have a bid from Norwest, who has recently illustrated increased dividends and a higher stock price than book value. We have had a relationship with this client for 15 years and we fell no risk with moving forward with this lessor.

Current Proposal:

As I have previously illustrated in another document, the acquisition of the equipment yields positive NPV, and therefore should be considered a financing decision. As the lessee, our vantage point is that this is a financing decision for us and an investment decision for Norwest.

NPV of leasing:

The NPV of leasing is -17,259, while the NPV cost of purchasing is -19,843.

Relevance of Tax Status in Analysis:

The relevance of our tax status is important in this analysis. In fact, it is one of the critical factors in determining whether the lease provides more value than the purchase. If the assumption is that the AMT will be paid for 15 years, we will use straight line depreciation in the analysis, with zero salvage value. The analysis will not use MACRS. If the decision is to lease the equipment, then BNRR cannot depreciate the asset all together. The value of owning the asset would be reduced because the asset would be depreciated straight line instead of accelerated.

Relevance of Residual Value in Analysis:

The second major factor in determining the highest value for the financing decision is the residual value computation. The residual...