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Lease vs Purchasing

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Leasing vs. Purchasing

Leasing vs. Purchasing
Purchasing or leasing a large asset is vital to the company’s financial bottom line. Businesses need to make ideal decisions based on what will help the growth of the company. Having a set financial plan in place that reviews not only the benefits but, also the losses will help determine if purchasing or leasing would be most beneficial for a company. Many factors will be addressed including taxes and time and money.
Lease Decision
Factors that should be consider before making a lease decision are the same factors that need to be evaluated to make a purchase decision. A plan should be put together addressing the following factors. What is the timeframe needed is it short or unknown, how soon would the item or be needed. I the space, item adequate, or will there be the cost associated with making the space or item adequate. Flexibility for growth and possible costs associated with expanding space or equipment in present location. Physical space location considerations, ability to grow, or possible relocation costs and travel time. Services needed for space or item or services close enough, cost for services that need to be implemented, networking, electrical, parking and security. Understanding cost such as “design fees, construction, moving expenses, and furnishing in addition to operating expenses”. (University of Missouri System, 2013) Funding type & availability needs to be determined with the company’s business officer or treasurer. (Mayo, 2012)
Factors Involved in Lease vs Purchase
Deciding whether to lease or buy any property there are many components to consider an area, cost, budget, expansion, location, economy, environment. Considerations such as length in time that the company will be occupying the space whether it a month to month lease or a long-term lease. With leasing, the company has the flexibility to use the space for a certain period of time allowing for growth and stability. Leases can be complicated in which companies are to restore the space back to normal once the lease has been terminated. Leasing buildings or property have stipulations that need to be met unlike purchasing. Purchasing and leasing property will have advantages and disadvantages for taxes. Property owners are entitled to the tax breaks for the property unlike leasing property unless otherwise stated within the means of the contract established. Leasing a property or building can be beneficial to a business. Businesses are able to write of lease payments but there are stipulations to this as the rent is deductible but, monies prior as a deposit are not deductible. Purchasing a property is beneficial for tax purposes also the company will be able to expand and reap the benefits of taxes and successful business. Many factors need to be considered when purchasing or leasing any property. Legal advice should be sought in both cases to avoid any hardship or loss or revenue.
Factors Involved in Making a Purchase Decision The first factor to consider when making a purchase decision is whether or not leasing should be an option. There are variables to consider when making that decision. These include the organizations tax brackets, terms of purchase, and residual value and cost of an asset. In purchasing anything especially equipment the organization could consider the life expectancy of the product and the depreciation value after a set amount of time. Another factor to consider in making a purchase decision is the environmental condition such as competition. Production issues based on consumer demands for new products are a determining factor. Consumers needs change all the time. It is vital to the organizations success that the purchases made are researched and the information gathered will allow the company to make sound decisions that will meet the consumers’ needs day in and day out without affecting the organization negatively.
Evaluating purchase decisions
The value of money being held may be considered depreciating. Investing proper cash flows in assets, purchases, or other business expenses are crucial business expenditures. “Operating revenues and expenses determine the project’s cash flows” (Titman, S., Keown, A. J., & Martin, J. D. (2014)). Purchasing equipment has benefits and negative aspects as well as leasing. Leasing is positive for short-term investing of assets for companies who only care to make a profit on a short–term basis with no commitment to the asset after revenue is collected. There is no depreciation of asset’s, which would antiquate to time loss of money. Leasing allows companies to benefit from negotiating contracts from the Lessee. Depending on the market for the asset time, interest, and other aspects of the lease are negotiable. Purchasing can benefit a company with long-term goals. Purchasing assets can become negative with depreciation of a value, equipment maintenance cost, equity depreciation, and risk. The asset is making money and will end with revenue built from that asset. In the best circumstances, a company has to distinguish the best time value of money while using it now (lease) or owning an asset and expenses with the asset.

References
Mayo, H. B. (2012). Basic Finance An Introduction to Financial (10th ed.). Mason, OH: Cengage Learning.
Titman, S., Keown, A. J., & Martin, J. D. (2014). Financial management: Principles and applications (12th ed.). Upper Saddle River, NJ: Pearson/Prentice Hall.
University of Missouri System. (2013, Febuary 11). Factors to consider in the decision to renovate, lease, buy, or build. Retrieved from http://www.umsystem.edu/ums/fa/management/business/factors

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