Real estate investment and analysis
Submitted by: Jerryson Anyawoe
Student ID:21015318
Own or Lease Analysis
Own
Lease
Lease Payments
-1,500,000
Lease payment Tax Shield
375,000
Interest Payments
-1,350,000
Interest Tax Shield
337,500
Depreciation Tax Shield
200,000
After-tax cash flow
-812,500
-1,125,000
Reversion
Net Sales Proceeds
Loan Balance
BTER
Tax
After Tax equity reversion
15,520,000
7,500,000
8,020,000
2,080,000
5,940,000
Difference
1,500,000
-375,000
-1,350,000
337,500
200,000
312,500
Original Basis
Adjusted Basis
Gain
Tax
0
1
2
3
4
5
IRR
-2,500,000
312,500
312,500
312,500
312,500
6,252,500
28.24%
10,000,000
7,200,000
8,320,000
2,080,000
Internal Rate of Return (IRR):
An IRR of 28.24% from the own or lease differential is considered financially viable, as it suggests a
potential positive return on the investment. The IRR exceeds the cost of debt which suggest potentially
higher returns than the cost debt (18%). IRR Is significantly higher than the cost of debt used in financing
the project.
Return on Equity (ROE):
The ROE of 30% indicates high positive returns from equity. This is likely to be more than the cost of
equity which mostly likely less than 18%
Cost of Debt:
The cost of debt is 18%, indicating the interest expense associated with borrowing funds.
Conclusion
Based on the computations above, it will financially viable to OWN than to lease based on reasons
below:
1.The IRR of the differential of cashflows of indicates the after-tax yield on capital invested positive.
2.The IRR differential is higher than cost of debt required to finance the project indicating returns asset
generate enough returns to cover the cost of debt.
3.Both IRR and ROE are higher than cost of debt indicating greater returns financially from the asset.
4.There could be other considerations in arriving at the decision to own or lease, but strictly from the
financial perspective, OWNING is the best option.