Primus Automation Division, 2002

12 Pages Posted: 21 Oct 2008

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Sean Carr

University of Virginia - Darden School of Business

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Abstract

In early 2002, an analyst, Tom Baumann, must propose terms for leasing one of his company's advanced factory-automation systems to a major customer. From the lessor's standpoint, the challenge is simply to design an annuity stream that yields a present value equal to, or greater than, the value of the asset being leased. Certain factors, however, serve to complicate the analysis. The tax exposure and debt rating of the customer are uncertain, leaving the analyst to estimate the impact of alternative lease terms under different tax and interest-rate assumptions. Also, the customer is considering leasing competing systems from companies in Germany and Japan; these competing proposals limit Primus's flexibility in tailoring its proposal. In short, the student's task is to design lease terms that exploit the lessee's tax and interest-rate exposure within constraints set by competitive terms.

Excerpt

UVA-F-1487

Version 2.1

PRIMUS AUTOMATION DIVISION, 2002

In early 2002, Tom Baumann, an analyst in the Marketing and Sales Group of the Factory Automation Division of Primus Corporation, had to recommend to the division sales manager, Jim Feldman, the terms under which Primus would lease one of its advanced systems to Avantjet Corporation, a manufacturer of corporate-jet aircraft. Specifically, Baumann was weighing a choice among four alternative sets of lease terms.

The problem of analyzing and setting lease terms was relatively new to Baumann and had arisen only a month earlier, when Avantjet informed Baumann and Feldman that its pending purchase of the factory-automation system had been put on indefinite hold. Avantjet's CEO had just ordered a moratorium on any capital expenditures that might negatively affect Avantjet's income statement and balance sheet. Baumann was not completely surprised by Avantjet's decision. Just recently, the Wall Street Journal had singled out Avantjet's declining stock price and worsening balance sheet as an example of manufacturers' deteriorating condition of during the economic recession.

Only three months earlier, Baumann and Feldman had won an apparent competition for Avantjet's business over Primus's leading competitors, Faulhaber Gmbh of Germany and Honshu Heavy Industries of Japan. Baumann feared that Avantjet's temporizing would give those two competitors an opportunity to renew their selling efforts to Avantjet.

. . .

Keywords: leasing, lease financing, finance, debt financial innovation

Suggested Citation

Bruner, Robert F. and Carr, Sean, Primus Automation Division, 2002. Darden Case No. UVA-F-1487, Available at SSRN: https://ssrn.com/abstract=1279940

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3823 (Phone)
434-924-0714 (Fax)

HOME PAGE: http://faculty.darden.edu/brunerb/

Sean Carr

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4812 (Phone)

HOME PAGE: http://www.batteninstitute.org

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