Hasbro Case

8/7/2019 Hasbro Case

1/14

Leasing vs. Buying

Hasbro Case

Presented By:

Sushant Dhall (13167)

Swati Agarwal (13168)

Umang Arora (13169)

Varun Sareen (13170)

Yogesh Raisinghani (13172)


2/14

Present Value of Cash Outflows under leasingalternative:

Assuming he plans to buy the machine at the end of 5th year.

Present value of machine=$6000*(PVIF@5%,5years)= 6000*0.784

= $4704

Total Present Value = $(18285.12+4704) = $22989.12

After Tax cash flow associated with the lease payment = $ 22989,considering that Hasbro would purchase the machinery.

Year After Tax Lease

Rentals

7000 (1-0.4)

Total cash

outflows

PVIFA @ 5 %

8% (1-0.4)

Total Present

Value

1 - 5 4200 4200 4.3536 18285.12


3/14

Working Notes

Borrowing & buying option:

EYI = Rs. $7514

Schedule of Debt Payment

Year End Loan o/s @

thebeginning of

the year

Loan

Installment

Interest

content @8%

Principal

Content

Loan o/s @

the end ofthe year

130000 7514 2400 5114 24886

224886 7514 1990.88 5523.12 19362.88

319362.88 7514 1549.03 5964.97 13397.91

413397.91 7514 1071.833 6442.167 6955.743

5 6955.743 7514 558.2568 6955.743 0


4/14

Schedule of Depreciation

Loss on sale of machine(at the end of the

effective life of the machine)

Book Value at the end of 5 years = $ 10,236.95

Salvage value = $ 6,000

Therefore, loss on sale of the machine = $ 4236.95

Year Value ofMachineryDepreciation

Factor Depreciation Amount

Balance at

the end ofYear

1 30,000.00 0.20 6,000.00 24,000.00

2 24,000.00 0.32 7,680.00 16,320.00

3 16,320.00 0.19 3,100.80 13,219.20

4 13,219.20 0.12 1,586.30 11,632.90

5 11,632.90 0.12 1,395.95 10,236.95


5/14

Present Value of Cash Outflows under buying

alternative:

Year LoanInstallme

nt

Tax advantage on: Net cashoutflow

PVIF@ 5%

Total cashoutflows

Maintenance

M(0.4)

Interest

I (0.4)

Depreciation

D (0.4)

1 7514 400 960 2400 3754 0.952 3573.8082 7514 400 760.35 3072 3281.65 0.907 2976.457

3 7514 400 619.61 1240.32 5254.07 0.864 4539.516

4 7514 400 428.73 634.52 6050.75 0.823 4979.767

5 7514 400 223.30 558.38 6332.32 0.784 4964.539

21034.81

Less: Present Value of Salvage value 6000 x 0.784 4704.00

Less: Present Value of tax savings on loss on sale of machine

4236.95 x 0.784 x 0.4

1328.70

Total 15002.10


6/14

Solution to Question 1

As per slide 2, after Tax cash flow associated

with the lease payment = $ 22989,

considering that Hasbro would purchase the

machinery.


7/14


As per slide 5, interest paid each year after tax

deduction is as below:

Year InterestI (0.4)

1 960

2 760.35

3 619.614 428.73

5 223.30

TOTAL $ 2,992


8/14


As per slide 5, depreciation paid each year

after tax deduction is as below:

Year DepreciationD (0.4)

1 2400

2 3072

3 1240.324 634.52

5 558.38

TOTAL $ 7,905.22


9/14


As per slide 5, Depreciation, maintenance & interestpaid each year after tax deduction is as below:

Total Tax shield: $ 12,897

Maintenance

M(0.4)

Interest

I (0.4)

Depreciation

D (0.4)

400 960 2400

400 760.35 3072

400 619.61 1240.32

400 428.73 634.52400 223.30 558.38


10/14


As per slide 5, the total net After Tax Cash

Outflows associated with the purchase of the

machinery is: $ 15002.10


11/14


The company is advised to buy the machinery as the

present value of cash outflows under the buying option

is lower than those obtained on leasing option.

Cost of Borrow and Buy option: $ 15,002

Cost of Leasing option: $ 22,989


12/14

Advantages of Leasing

Advantages to the lessee:

1. Tax Benefits

2. Additional sources of Finance

3. Financing of capital goods

4. Simplicity & less costly

Advantages to the lessor:

1. Full security

2. High profitability3. Growth potential

4. Tax Benefits


13/14

Disadvantages of Leasing

Restrictions on use of Equipment.

Loss of Residual value

Double Sales tax


14/14

Answer to Question 8

Factors determining the Hasbro decision to

lease/ buy or not buy the machinery

1. The salvage value compared to the valueafter depreciation of 5 yrs.

2. Future business opportunity

3. Requirement of the same technology forfurther use

Documents

Hasbro Case