APOLLO MANUFACTURING

CORPORATION CASE
STUDY

Nephi Benjamin B. Guillermo

INTRODUCTION

Apollo Manufacturing Corporation was founded in San Diego, California by Vincent (Vince)
Coston and Thomas (Tom) Catton, individuals with a shared vision of creating a unique and better
kind of manufacturing business, after the Korean War.

Starting out from their own savings and unexpected inheritance fifty years ago, Apollo has
grown into a world-class company that designs, manufactures and distribute internationally a
wide range of different products based on customer’s specification regarding the product design.
The company accepts made-to-order designs and ensure the products ordered are ship on time.
The company’s product lines also includes; Lampshades and other lighting items, Photo frames,
Decorative Items, Seasonal Items.

Apollo has maintained high standards of product quality and customer service to the
demands of the company’s clients from the United States, Canada, Japan, Australia and several
parts of Europe and the middle East- delivering on-specific products on time, all the time.

Due to continuous increase in demand of its products internationally, Apollo Manufacturing

Corporation is currently on the verge of making decision whether to lease or acquire a new
automatic assembly machine for the company costing 100,000 US Dollar. Thus, needs financial
advice regarding cost-wise and cost effectiveness considering its current financial situation. The
machine is said to be helpful in the operation of the business in terms of further Expansion,
Costumer’s attraction and Profitability.

Hence, Madiha Shah a Certified Public Accountant , having fifteen years of corporate
experience have recently hired by Tom and Vince as Chief financial Officer to help on the above-
mentioned problem and to give the best advice or decision the company could have. She’s been
working at the company for two months and already familiarized herself into the company’s
objective such as expansion of the business and how this objective should be achieved. She had
done her research regarding financial conditions of the company on Vince and Tom and knew by
talking with her professional connections and found out that Apollo Manufacturing had a great
reputation.

Considering the different factors that may affect the decisions such as debt covenants
company currently had that may severely restrict acquiring new equipment using loans or even
leasing, loans, possible debt restructuring, refinancing, inflation in interest rates also Apollo’s
recent credit rating, current before-tax cost of borrowing, recent tax laws changes and
depreciation method which is the Internal Revenue Service’s 10-year Modified Accelerated Cost
Recovery System (MACRS), Madiha is now facing a real challenge as a Chief Financial Officer that
would have a serious impact on the company’s future.

Additionally, together with Sharon Black, a company’s purchasing manager, Tom and Vince
considered at least three different leasing companies to determine which lease term would give
the maximum benefit to the company.

I. POINT OF VIEW
 Madiha Shah, Apollo Manufacturing Company’s Chief Financial Officer should assess
reasonably the three different lease terms, evaluate their possible impact on the
company and eventually compared the result to the impact when the company choose
to acquire rather.

II. MAIN PROBLEM

 Is to acquire the new automatic assembly machine the best decision? Or to lease?

III. OBJECTIVES
 To determine the Net Present Value (NPV) of the three lease terms using the after-tax
cost of borrowing and which lease term has the best deal for the company
 To determine the implied before-tax borrowing rate and how does that rate compare
to the company’s borrowing cost
 To determine which term sheets make a leasing a better option for the company and
why
 To determine other factors that the company should consider in making a lease
decision
 To identify pros and cons of leasing and to determine the final conclusion based upon
the financial analysis

SWOT ANALYSIS

STRENGTHS
1. Committed owners and well-versed
financial analyst.
2. Good business reputation.
3. Stable increase in profits signifying
profitability and growth.
WEAKNESSES
1. The company’s long term debt to
asset covenant is restrictive
therefore limits the purchase or
lease of new equipment.

OPPORTUNITIES
1. Expansion of operations.
2. New customer attraction
3. Increased profitability and revenues
THREATS
1. Increasing interest rates that may
curb off profits to a very minimal
level
2. Restrictive long term debt to asset
covenant
3. With tax bracket the company is
currently under, profits may be
lowered further due to increased
tax rates

FINANCIAL ANALYSIS

Purchase Decision
Stanford Leasing Company:

PV of Purchase Price (100,000 x 0.5838) 58,380

PV of Salvage Value (20,000 x 0.5838) 11,676
Total 70,056

Georgia Leasing Company:

PV of Purchase Price (100,000 x 0.5838) 58,380

PV of Salvage Value (25,000 x 0.5838) 14,595
Total 72,975

ND Commercial Bank:

PV of Purchase Price (100,000 x 0.5838) 58,380

PV of Salvage Value (22,000 x 0.5838) 12,844
Total 71,224

Lease Decision

Net Present Value

STANFORD LEASING COMPANY

YEAR LEASE PRIOR YEAR’S NET CASH DISCOUNT PRESENT
PAYMENT TAX SAVINGS FLOW FACTOR VALUE
1 16500 16500 1.000 16500
2 16500 3465 13035 .9476 12352
3 16500 3465 13035 .8979 11704
4 16500 3465 13035 .8509 11091
5 16500 3465 13035 .8063 10510
6 16500 3465 13035 .7640 9959
7 16500 3465 13035 .7240 9437
8 3465 (3465) .6861 (2377)
NET PRESENT VALUE 79, 176

GEORGIA LEASING CORPORATION

YEAR LEASE PRIOR YEAR’S NET CASH DISCOUNT PRESENT
PAYMENT TAX SAVINGS FLOW FACTOR VALUE
 1 15000 15000 1.000 15000
2 15000 3150 11850 .9476 11229
3 15000 3150 11850 .8979 10640
4 15000 3150 11850 .8509 10083
5 15000 3150 11850 .8063 9555
6 15000 3150 11850 .7640 9053
7 15000 3150 11850 .7240 8579
8 3150 (3150) .6861 (2161)
NET PRESENT VALUE 71, 978

ND COMMERCIAL BANK
YEAR LEASE PRIOR YEAR’S NET CASH DISCOUNT PRESENT
PAYMENT TAX SAVINGS FLOW FACTOR VALUE
1 15500 15500 1.000 15500
2 15500 3255 12245 .9476 11603
3 15500 3255 12245 .8979 10995
4 15500 3255 12245 .8509 10419
5 15500 3255 12245 .8063 9873
6 15500 3255 12245 .7640 9355
7 15500 3255 12245 .7240 8865
8 3255 (3255) .6861 (2233)
NET PRESENT VALUE 74, 377

In comparing the three candidates for the lease term, the highest resulting Net Present Value
is the Stanford Leasing Company with P79, 176. Therefore, it is the best deal for the company.

Internal Rate of Return

STANFORD LEASING COMPANY

YEAR PV OF LEASE PAYMENT PV OF PRIOR YEAR’S
TAX SAVINGS
1 16500 3283
2 15635 3111
3 14815 2948
4 14040 2794
5 13304 2647
6 12606 2509
7 11946 2377
Total 98846 19669

The implied before tax borrowing rate was computed by dividing the PV of lease payments to
the PV of prior year’s tax saving. The IRR for Stanford Leasing Company resulted to a rate of 19.80%.

GEORGIA LEASING CORPORATION

YEAR PV OF LEASE PAYMENT PV OF PRIOR YEAR’S
TAX SAVINGS
1 15000 2985
 2 14214 2828
3 13469 2680
4 12764 2540
5 12095 2401
6 11460 2281
7 10860 2161
Total 89862 17882

The implied before tax borrowing rate was computed by dividing the PV of lease
payments to the PV of prior year’s tax saving. The IRR for Georgia Leasing Company resulted to a rate
of 19.94%.

ND COMMERCIAL BANK
YEAR PV OF LEASE PAYMENT PV OF PRIOR
YEAR’S TAX
SAVINGS
1 15500 3084
2 14688 2923
3 13917 2770
4 13189 2625
5 12498 2487
6 11842 2357
7 11222 2233
Total 92856 18479

The implied before tax borrowing rate was computed by dividing the PV of lease payments to
the PV of prior year’s tax saving. The IRR for ND Commercial Bank resulted to a rate of 19.90%.

Factors that must be considered in making a lease decision:

 Cash outlay is less than if you purchase

 Cash Flow. A business can conserve its cash flow by leasing. Under lease, the initial
cash expense for facility will be month’s rent and a security deposit.
 Credit Planning. The company has not established a credit rating sufficient to
support a mortgage.
 Maintenance. The landlord is responsible for maintaining the property
 Property. You have been unable to find suitable property that is for sale.
 Real Estate Values. The facility you’ve found meets the needs of the business but is
located in an area where property values are declining.
 Mobility. You’re not sure that the facility will meet the future needs of the business.
 Tax Savings. Rent is deductible as a business expense.

Pros and Cons of Leasing

Pros Cons
  Lease payments are lower than loan
payments
 Get a new unit every few years
 No hassles at the end of the lease
 You don’t own the unit
 Penalties for wear and tear
 Added Cost
 A contract is a contract
 Endless payments

CONCLUSION and RECOMMENDATION

In analysing the IRR results, the highest resulting IRR is the Georgia Leasing Corporation with
19.94% but when using Net Present Value, the highest resulting candidate is the Stanford Leasing
Corporation with P79,176.

I have compared the Purchase Decision and Lease Decision results. Based on the above
computations, two of the term sheets resulted in leasing the machine and one ended up in
purchasing it. Stanford Leasing Company and ND Commercial Bank resulted in leasing the machine
and Georgia Leasing Company resulted in purchasing it.

Curriculum Vitae
Personal Profile

Name: Nephi Benjamin Guillermo

Date of Birth: October 1, 1993

Place of Birth: Centro East, Ballesteros, Cagayan

Status: Single

Mother: Rubi Rosa B. Guillermo

Father: Benjamin B. Guillermo, Jr.

Educational Background:

Elementary: Mabuttal Elementary School

High School: Northern Cagayan Colleges

College: Cagayan State University – Andrews Campus

To be CPA!