Agro-Chem Case Analysis

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Group 2: Michael Argyrou, Patrick Bross, Daniel Mills, David Lloyd, Robert Curl Finance 312-010 Professor Detwiler May 1st 2009 Agro-Chem, Inc. Problem Statement: Agro-Chem. Inc has hired our consultant group to help make a big lease versus purchase decision for their company. If we are to simply analyze the information and data they are presenting to us thus far, our conclusion may be met more easily. However, a few problems have been brought to our attention after reviewing the case, and it is our job to extend our analysis to prepare a fully thought out recommendation for Agro-Chem. Inc. For our situation Agro-Chem. decided to use a 14% discount rate to determine the present value costs of leasing and of purchasing. However, this number was not necessarily agreed upon. A 12% discount rate was also proposed by the company’s assistant treasurer. The company’s CPA firm also reviewed the situation and in result, there was further disagreement. Although Agro-Chem. decided to use this rate, was this the right choice for the company? This is very important to consider. Another problem that is revealed is that the salvage value at the end of the fourth year is relatively uncertain. The equipments residual value could be as a low as $0 and as high as $510,000. The probabilities of these extreme values are 0.25 which is not as small as you would think. This information here leaves a lot of chance in the situation. Another problem to point out is held with Lonestar. A few of their executives believe that the residual value in this case will be much higher than expected due to the expanding nature of Agro-Chem. Inc. This brings up a larger problem that cannot be ignored. It seems as if it is only an assumption that Agro-Chem. will be moving and expanding after four years. When there are big investments on the table it is a bit risky to assume. Whether or not the
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