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Lease versus Purchase

Ashley Neighbors, Kenterrian Hall, Chelsea Lester,

FIN – 370 / Finance for Business

September 15, 2014

Timothy Gould

Lease versus Purchase


There are many differences between leasing, purchasing, and having a maintenance agreement on equipment. When deciding which route to take one must consider price as well as look at all aspects in the process. Reviewing the additional problem at the end of chapter 27 of Basic Finance, comparing leasing versus purchasing, one can see the break down of each option to better understand which way will save more money as well as be more beneficial.


Management has decided to acquire a new asset that costs $200,000. The estimated economic life of the asset is five years, but the firm wants the use of the asset only for three years. If the firm purchases the asset, it anticipates selling it at the end of three years for $50,000. The firm may lease the asset for $55,000 a year paid at the end of each year. The lease does not include maintenance. It is estimated that annual maintenance initially will be $5,000, paid at the end of the year, but that cost will increase by $1,000 each year as the asset ages.


The firm could purchase the asset with a five-year loan of $200,000. The loan will be retired in five payments of $40,000 unless the equipment is sold, in which case the loan must be paid off at closing of the sale. The interest rate is 10 percent and is paid at the end of each year on the balance owed. If the firm does purchase the asset, it will enter into a maintenance agreement with the manufacturer that costs $5,000 a year. The firm's tax bracket is 40 percent.

Maintenance Agreement

The new asset being considered for lease or purchase will need to be maintained regardless of their choice between leasing and purchasing. Either way, the estimated cost for the maintenance agreement is $5,000 for the first year and rising by $1,000 each year after that. Since the company decided to enter into the maintenance agreement whether the lease or buy this will have no factor in determining the best route.


Since the present value of the cash outflows from owning exceeds the present value of the cash outflows from leasing, leasing is preferred. Based on the information the firm will have more associated with the cost of cash inflows and outflows. Purchasing a maintenance agreement will benefit the life of the machine regardless of leasing or purchasing.


Herbert B. Mayo. (2012). Intermediate-Term Debt and Leasing. Retrieved from Herbert B. Mayo, FIN/370 - FINANCE FOR BUSINESS website.

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