Finc312 Case 3
Agro-Chem, Inc
Leasing – Case 49
Problem Statement:
Agro-Chem, Inc. is a regional producer of agricultural chemicals based in Houston Texas that needs help making a lease versus purchase decision. By understanding the material presented, we will be able to come to a decision. However, after reviewing the information presented, there are a few problems that need to be investigated before finalizing our recommendation. Agro-Chem, Inc. chose to go with the financial manager’s idea of using a discount rate of 14% (average risk) to figure out the present value costs of leasing and purchasing even though the assistant treasure suggested a 12% (low risk) discount rate. Agro-Chem, Inc. brought in the company’s CPA to help settle the debate but this only led to further confusion and disagreement concerning the appropriate discount rate which concerns us and should be taken into consideration. In addition it concerns us that the salvage value is unclear for the end of the fourth year. The probabilities of the equipment’s residual values, which are pretty extreme, are 0.25 which concludes that the situation could vary greatly. Another problem is that Lonestar’s executives think that the equipment’s residual value will be larger than expected as a result of possible expansion. This is a risk factor that has to be analyzed because relocating will affect the final decision. Due to these issues, we have come up with solutions to fix these problems as well as a final decision concerning the lease versus purchase decision.
Background Information:
To prevent the use of certain fertilizers and pesticides that do not meet safety standards, Texas officials have proposed new regulations. The chemicals just stated were banned because they were considered a threat to Texas’ aquifers. Due to this ban and new standards, Agro-Chem, Inc. created a new pesticide which needs equipment to start production. The IRR for the project has low risk of 25% so it would use a 12% after tax cost
Leasing – Case 49
Problem Statement:
Agro-Chem, Inc. is a regional producer of agricultural chemicals based in Houston Texas that needs help making a lease versus purchase decision. By understanding the material presented, we will be able to come to a decision. However, after reviewing the information presented, there are a few problems that need to be investigated before finalizing our recommendation. Agro-Chem, Inc. chose to go with the financial manager’s idea of using a discount rate of 14% (average risk) to figure out the present value costs of leasing and purchasing even though the assistant treasure suggested a 12% (low risk) discount rate. Agro-Chem, Inc. brought in the company’s CPA to help settle the debate but this only led to further confusion and disagreement concerning the appropriate discount rate which concerns us and should be taken into consideration. In addition it concerns us that the salvage value is unclear for the end of the fourth year. The probabilities of the equipment’s residual values, which are pretty extreme, are 0.25 which concludes that the situation could vary greatly. Another problem is that Lonestar’s executives think that the equipment’s residual value will be larger than expected as a result of possible expansion. This is a risk factor that has to be analyzed because relocating will affect the final decision. Due to these issues, we have come up with solutions to fix these problems as well as a final decision concerning the lease versus purchase decision.
Background Information:
To prevent the use of certain fertilizers and pesticides that do not meet safety standards, Texas officials have proposed new regulations. The chemicals just stated were banned because they were considered a threat to Texas’ aquifers. Due to this ban and new standards, Agro-Chem, Inc. created a new pesticide which needs equipment to start production. The IRR for the project has low risk of 25% so it would use a 12% after tax cost