The Fertile Corporation plans to build or lease a new plant that will produce liquid fertilizer for the agricultural market. The plant is expected to cost $800,000,000 and will be located in the southwestern United States. The company’s chief financial officer, Sharon Weiss, has spent the last several weeks studying different means of financing the plant. Following her talks with bankers and other financiers, she has decided that there are two basic choices: the plant can be financed through the issuance of a long-term bond or through a long-term lease. Details for the two options are as follows:

1. Issue $800,000,000 of 25-year, 16 percent bonds secured by the new plant. Interest on the bonds would be payable semiannually.

2. Sign a 25-year lease for an existing plant calling for lease payments of $65,400,000 on a semiannual basis.

Weiss wants to know what effect each choice would have on the company’s financial statements. She estimates that the useful life of the plant is 25 years, at which time the plant is expected to have an estimated residual value of $80,000,000.

Weiss is planning a meeting to discuss the alternatives. Write a short memorandum to her identifying the issues that should be considered at this meeting.