September 29th, 2021, 6:46 pm
I'm probably way out of my depth here, but a couple of questions that might help move the ball forward:
- This looks more like a optimal cost exercise for manufacturing rather than an asset investment decision, i.e. your optimal solution should be complete consumption of the metals rather than re-sale at higher price, no? otherwise shut down the company or kill the project (GE financial comes to mind).
- How are you measuring the opportunity cost of Cash? how would you finance the purchase vs the lease? how does the cashflow profile look for the business?
- How are you modelling demand for the metal within the manufacturing process? seems like a key component on the decision
- The bit about "Offset by an uncertain salvage value at T =N" goes both ways I think, if you consume the metal that was under a lease you might end up needing to buy it/sell it later on at a higher/lower price, optimal exercise type of issue I guess, unless like you said there is a way recover it but still the cost would be there anyway.