CASE 16 QUESTIONS
SEATTLE CANCER CENTER
1. As a baseline, assume all cash flows have the same risk (that is, ignore residual value risk and use the same discount rate for all lessee and lessor cash flows), and ignore the leveraged lease analysis.
a. Should the Center lease the equipment? Should GBF write the lease?
b. Who is getting the better deal? Explain.
c. What is the maximum lease payment that the Center would be willing to pay? What is the minimum lease payment that GBF would be willing to accept?
d. What factor influences whether the actual lease payment will be closer to the Center’s maximum lease payment or GBF’s minimum lease payment?
2. This lease is attractive to both parties because there is asymmetry of inputs between the lessee and lessor.
a. What are these asymmetries?
b. What would be the result if there were no asymmetries? Use the model to prove it.
3. The Center is considering the inclusion of a cancellation clause in the lease contract, in which it could cancel the lease at any time after giving a minimum 30-day notice.
a. What effect would a cancellation clause have on the risk of the lease to the Center and the risk of the lease to GBF? Why? No additional calculations are required.
b. What might GBF do to compensate for the change in risk? No additional calculations are required.
4. GBF has indicated that it would be willing to write lease at a rate of $7,000 per procedure.
a. Graph the annual profit of a per procedure lease and the annual profit of an annual lease against the number of procedures.
b. Compare the risk of the per procedure lease with that of the conventional lease from the perspectives of both the lessee and lessor.
5. Tax-exempt (municipal) debt financing may be available to the Center. Assume all cash flows have the same risk (that is, use the same discount rate on all lessee cash flows), and ignore the leveraged lease analysis.
a. What would be the NAL to the Center if tax-exempt financing was available?
b. Would the availability of tax-exempt debt financing make leasing more or less attractive to the Center than it was before? Why?
c. Are lessees more likely to be in higher- or lower-income tax brackets than lessors? Why?
6. Return to baseline assumptions. The residual value of the Gamma knife is judged to have high risk. Ignore the leveraged lease analysis.
a. What is the NAL to the Center after adjusting for the riskiness inherent in the residual value?
b. Does recognition of residual value risk make leasing more or less attractive to the Center than it was before? Why?
7. Return to baseline assumptions. GBF can obtain a $1,500,000 simple interest loan from its bank at a cost of either 7 or 9 percent that it would use to leverage the lease.
a. What are the lessor’s NPV and IRR of a leveraged lease at a loan rate of 7%? Should the lessor take the loan if the interest rate is 7%? Justify your answer.
b. What are the lessor’s NPV and IRR of a leveraged lease at a loan rate of 9%? Should the lessor take the loan if the interest rate is 9%? Justify your answer.
8. If the Center decides to lease, will the lease be classified as a capital lease and shown directly on the balance sheet? Show your calculations. Assume all cash flows have the same risk (that is, use the same discount rate for all lessee and lessor cash flows), and ignore the leveraged lease analysis.
9. a. From the perspective of the Center, what types of financial risk are present in this decision?
b. Finally, considering all relevant factors, what should the Center do?
—Lease with a cancellation clause
—Lease without a cancellation clause
—Lease per procedure
10. In your opinion, what are three key learning points from this case?