Primus Automation Division
Matthew Probst, Matthew Kennedy, Hailey Ritenour
Executive Summary Primus Automation is a manufacturer and services firm that has operations worldwide. Primus’s products include, Programmable Controllers, Numerical Controls, Industrial Computers, Manufacturing Software, Factory-Automation Systems, Data Communication Networks. Over the past few years Primus has experienced slower growth and increased competition for market share. Three months earlier Primus was competing with two foreign firms to sell the equipment to Avantjet. Primus is looking for a lease with terms that will give them a NPV that is higher than the asset they are lending. Primus will assume credit risks and must decide if the return from the lease is favorable enough for the risk taken. Primus will also be dealing with a residual value risk. If primus does not lease the system, they will probably lose the customer. Primus’s objective is to asses the risk and determine if the lease is economically attractive.
The problem with creating these lease terms is that Avantjet’s cost of debt and tax rate are unknown to Primus. Because of this we created four different leasing option scenarios. Each scenario offered a high and low cost of debt with either zero or 34% tax. In our analysis we calculated Avantjet's cost of debt to be about 13%. As Avantjets cost of debt rises lease financing becomes more attractive. The lower the tax rate also makes leasing attractive option. The discount used for these lease payments is the after tax cost of debt. This is because lease payments are very predictable and behave much like loan payments.
When evaluating the competition from Faulhaber and Honshu we compared the IRR of the lease costs between the companies lease options. From this we found that Primus’s options are superior to Honshu’s lease proposal under all four