Question 4: The Runner Corp is a cell phone company that offers its customers a choice...
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Question 4: The Runner Corp is a cell phone company that offers its customers a choice between buying and leasing their cell phone. Cell phone contracts have a duration of three years. Under the LEASE option, customers pay $325 each year (years 1-3) in financing charges for the cell phone itself, which they own at the end of the three years. In addition, each customer generates contribution margin from cell phone services of $1,200 in each year 1-3. Under the BUY option, the customer pays $720 upfront (year 0) for the phone. A customer who opts to BUY the phone is estimated to generate 3% higher contribution margin from cell phone services than the average LEASE customer. For simplicity, assume all cash flows are collected at the last day of the respective year. Customers may break the cell phone service contract with Runner Corp at any time, regardless whether they have bought or leased the phone. They would owe no penalties for foregone future service charges. But if they are leasing the phone, they will have to pay the present value of the remaining financing charges at the time they break the contract. The store manager is paid a commission (pay performance sensitivity) of 7% of all cash flows generated as a bonus. The firm's discount rate is 5%. Required: a. b. C. d. Which of the two options - BUY or LEASE - has a higher net present value for the shareholders? Which of the two options will the store manager push for if she has a long planning horizon and is just as patient as the shareholders? Which of the two options will the store manager push for if she has the same discount rate as shareholders but plans to change jobs at the end of year 2? Come up with an improved performance measurement system to avoid any problems you have identified in part c. Question 4: The Runner Corp is a cell phone company that offers its customers a choice between buying and leasing their cell phone. Cell phone contracts have a duration of three years. Under the LEASE option, customers pay $325 each year (years 1-3) in financing charges for the cell phone itself, which they own at the end of the three years. In addition, each customer generates contribution margin from cell phone services of $1,200 in each year 1-3. Under the BUY option, the customer pays $720 upfront (year 0) for the phone. A customer who opts to BUY the phone is estimated to generate 3% higher contribution margin from cell phone services than the average LEASE customer. For simplicity, assume all cash flows are collected at the last day of the respective year. Customers may break the cell phone service contract with Runner Corp at any time, regardless whether they have bought or leased the phone. They would owe no penalties for foregone future service charges. But if they are leasing the phone, they will have to pay the present value of the remaining financing charges at the time they break the contract. The store manager is paid a commission (pay performance sensitivity) of 7% of all cash flows generated as a bonus. The firm's discount rate is 5%. Required: a. b. C. d. Which of the two options - BUY or LEASE - has a higher net present value for the shareholders? Which of the two options will the store manager push for if she has a long planning horizon and is just as patient as the shareholders? Which of the two options will the store manager push for if she has the same discount rate as shareholders but plans to change jobs at the end of year 2? Come up with an improved performance measurement system to avoid any problems you have identified in part c.
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Related Book For
Fundamental Accounting Principles
ISBN: 978-0077862275
22nd edition
Authors: John Wild, Ken Shaw, Barbara Chiappetta
Posted Date:
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