...Lease Versus Purchase Rose Kincaid, L’Tanya Watts & Ami Norfeldt FIN/370 April 20, 2015 Michael Rodriguez When a company is making a determination if it should lease or purchase equipment there are factors used to weight the best advantage for the company financial health. One of the variables affecting the decision is the tax bracket in which they are classified and the cost of buying the asset. If the lease is classified as an operating lease the company has benefits of using assets without any risk from maintenance and receives the write-off for the business expense. The value and depreciation are the responsibility of the lessor the companies only are to maintain the cost on the balance sheet when certain conditions are met. In this scenario, management needs to make a decision whether or not to buy or lease an asset valued at $200,000. Calculating the present value of the cash outflows and inflows of the asset is imperative to the analysis of the investment. The cash inflows and outflows generated from leasing affects the bottom line differently than purchasing. It is important to determine the asset’s residual value to achieve maximum advantages of either option. Various factors including the company’s tax bracket and cost of the fund directly affected the firm’s decision to lease the asset versus buying it. The present value of the buying cash outflows by far exceeded the leasing cash outflow. Considering the pros of cons of leasing versus buying is...
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...Lease versus Purchase FIN/370 March 30, 2015 Russel Riggs Lease versus Purchase Buy or lease equipment? This question is based and depends on the business “status”, which means that depends on the business capital budget, projections in short/long-term and the necessity of the equipment. Leasing business equipment and tools preserves capital and provide flexibility but may cost you more in the long run, (“NOLO”, 2014). On the other hand, buying equipment means ownerships and tax breaks make buying businesses equipment appealing, but high initial cost mean this option is not for everyone, (“NOLO”, 2014). At the moment to grow a business it will need tools in order to function properly and generate good profits, thus the business must analyze the initial investment that is required, the tax rate and the equipment’s time period of use to do not affect the business finance founds. May the business lease if it is necessary to change constantly the equipment or may the business buy the equipment because it will be until it gets old. Further in this essay we will explain different point of view with its respective example to consider whether to buy or lease. Both leasing and purchasing products has its place, but it is important to determine which path to take for each situation. A lease “permits the firm (lessee) to use the asset without acquiring title, which is retained by the owner (the lessor).”(Titman, Keown & Martin, 2014) Then in order to use the asset the lessee...
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...Lease Versus Purchase Should your company lease or purchase equipment? The answer to this depends on circumstance. Leasing equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life, both areas will be compared for a decision. Purchasing Before making the decision to purchase or lease a business needs to evaluate how the equipment will be used and the useful life of the equipment. Purchasing equipment has both pros and cons depending on the circumstances. Equipment of any kinds has maintenance and repairs over the years. One advantage for this company purchasing the equipment is a lower cost of maintenance. Typically the firm is responsible for all maintenance cost associated with the product, but there is options for extended warranties to cover the cost of repairs that need to be made. (Quickbooks.intuit.com, 2014). The firm is able to enter into a maintenance contract with the manufacture of a flat rate of $5000 a year (Titman, Keown, & Martin, 2014). Because leasing does not include maintenance the cost would grow each year as the equipment ages and becomes more prone to problems. A big disadvantage to purchasing equipment is the interest payments associated with the loan. Over the three years the firm will own the piece of equipment their average interest payment will be...
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...Lease versus Purchase A company looking at new equipment has options; leasing or purchasing. There are many equations a company can use to help determine which is best fit for its business. Exploring all options is the best place to begin when looking at an acquisition. Purchasing A company decides it will purchase new equipment must look at different variables making this decision. The company will look at things like its tax bracket and how much it will cost to make a purchase. The company will also look at the value of the equipment once the term of the loan is completed. The salvage return if the company decides it would like to sell the equipment after its use. At this time, when a business makes a purchase, they will list it on a balance sheet; unlike a lease, which does not at this time (Mayo, 2012). If a company, purchases an asset there are tax implications if the asset is sold at more than book value. Leasing A company decides to lease equipment; it will look at many of the same things when determining if the lease is the best option. Leasing allows the company to avoid things like maintenance if the contract so states. There is also the risk of early termination fees if the business no longer has a need for the equipment before the contract has expired. A company can benefit from potential tax advantage based on lease or rental expense, which is tax deductible. The Financial Accounting Standards Board has set four conditions and if met when leasing, a...
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...Lease Versus Purchase Paper Merita Likins FIN/370 March 9, 2015 Kimber Rueff Lease Versus Purchase Paper The choice to lease or buy is tricky for both the individual and the corporation. One must figure out which is cheaper; leasing or purchasing by borrowing money. Many things must be taken into consideration when determining the lease or buy options. One must consider taxes, depreciation, lease payment amounts, repayment time of the interest and principle, and residual asset value. Based upon these factors one can see by comparison which is the better choice, depending on the situation. An example of this is retailers that rent household items to consumers. It seems like an easy way to have those home furnishings you need without having to pay all that money outright. These firms will rent televisions or washers and dryers to you for a weekly fee. Once you do the math you can see that by renting these items you end up paying more than the present value or future value of the item. For what you pay in interest you may have been able to buy both the television and washer and dryer. On the other hand, if you borrow the money you may end up paying a higher interest rate than renting. To make any informed decision on whether to rent or buy, you must review all the details and do the math. Reference Mayo, H. B. (2012). Basic Finance: An Introduction to Institutions, Investments, and Management (10th ed.). Mason, OH:...
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...proposal, we demonstrate how equipment leases take advantage of the benefits of reduced depreciation and taxation, easy scalability, reduction of IT staff usage, reduced energy costs, and reduction of capital spending. The company can free up money overall and maintain better control of the IT budget by leasing. The cost of equipment is spread out over a 3-year period by leasing. There are no disposal fees because the leasing company will be responsible for the equipment leased. By replacing the current sever setup ( the company has over a dozen machines running 24 hours every day), with new leased IBM compact server, we will cut power costs by up to 50%. CONTENTS Summary 2 Introduction 4 Discussion 4 Requirements Scope and Background 4 requirements to be achieved: 4 several leasing and finance companies with the best solutions for the company 4 Salary Expense Before Leasing fig 1 5 Salary Expense After Leasing fig 2 5 Leasing and Financing Programs 7 Leasing and Financing fig3 7 benefits of hiring a leasing company: 8 Conclusion 9 Bibliography 10 Appendix A 11 INTRODUCTION This report explores the methods other companies use to conserve working capital. The recommendation is to lease to keep the company at the forefront of the technology curve, and keep working capital free. The company will also have the option to upgrade equipment when the next advancement occurs at a fraction of the purchase price of the same equipment. Leasing...
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...Assessment REPORT ON ‘LEASE AND HIRE PURCHASE COMPANIES’ Submitted by SIVAGNANAM KARTHIKEYAN ROLL NO: 135 DIV ‘B’ BBA. LLB. BATCH 2013-18 LEASING A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage. Lease financing is based on the observation made by Donald B. Grant: “Why own a cow when the milk is so cheap? All you really need is milk and not the cow.” Leasing industry plays an important role in the economic development of a country by providing money incentives to lessee. The lessee does not have to pay the cost of asset at the time of signing the contract of leases. Leasing contracts are more flexible so lessees can structure the leasing contracts according to their needs for finance. The lessee can also pass on the risk of obsolescence to the lessor by acquiring those appliances, which have high technological obsolescence. Today, most of us are familiar with leases of houses, apartments, offices, etc. Two important categories of leases are: Operating Leases and Financial Leases. Operating leases are short term, cancellable...
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...Lease versus Purchase Andrew Senkus, Brent Farmer, Clinton Eubanks, Cynthia Albert, Evan McMurray, & Shante Howard Finance for Business / FIN370 December 8, 2014 Su-Yi Lien Lease versus Purchase When it comes time for a company to make a larger investment, they are faced with the question of purchasing versus leasing. In making this decision a few things must be kept in mind. Leasing assets require a much smaller cash outlay than purchasing the assets. Many times when leasing, a maintenance contract will be included to help with the cost of maintenance. When certain assets are leased, it is possible to deduct the interest of the lease from the company’s tax return. On the other hand buying assets allows the company to take advantage of certain tax depreciation benefits. Once the assets are purchased and paid in full, the company will own these assets free and clear. Therefore, if and when the company decides to sell the assets all of the funds received in the selling of the assets will be profit for the company. A problem from our text will be used to illustrate how a firm might solve this dilemma. The Problem The problem in the text explains that management is looking to acquire assets that have a total cost of $200,000.00. The firm only needs the assets for a total of three years while the assets have an economic life of five years. The firm plans to sell the asset for $50,000.00 at the end of the three years of use. The firm must choose...
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...ten years in length and is either term loans or a lease on real estate or equipment. A firm will consider many factors in deciding whether to take a loan for the purchase of the asset to be used or to lease the asset. Herbert Mayo lists several variables firms that should be looking at when deciding to buy or to lease “These include the firm’s tax bracket, the terms of the lease, the asset’s anticipated residual value, and the cost of obtaining funds to buy the asset (Pg. 589)”. The firm must also conduct a cost analysis to determine which method will be the most cost effective to the firm by determining the present value of both purchasing and leasing the asset. The firm will purchase the asset if the costs are less than the cost of leasing, and will lease the asset if the costs of leasing are less than the cost of purchasing. The firm must also decide if they what ownership of the asset. (Mayo, H.B., 2012) Leasing or renting, is a contractual obligation between a lessee, the person leasing, and a lessor, which is the owner of the asset being leased. Leasing contracts can range from any period, and lease financing can provide a solution to both short and long-term debt. There are two classes of leases: operating leases and financial leases. Operating leases are in use for leasing equipment and vehicles, and operating leases sometimes include a maintenance contract. According to Mayo (2012), “The length of the lease is less than the expected life of the asset...
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...Lease Vs Purchase Paper Team B FIN 370 March 12, 2015 Davidson Jansen Lease Vs Purchase Paper Leasing versus purchasing advantages and disadvantages When equipment is leased one of the main advantages is that the equipment is kept up –to-date. For example, if a company lease a car for two years, once the contract is done, the company can lease or buy a newer car with newer technology. Another big advantages for leasing equipment in the business world is the predictability of monthly expenses. A lease comes with a pre-determined monthly line item which is most helpful during the monthly budgeting. One of the biggest disadvantages of leasing is the fact that at the end a company will end up paying more for the product or equipment (Alexander, 2015). When a company purchase equipment the biggest advantage is the availability to deduct the full cost of the equipment on the company’s taxes. Another big advantage is that freedom of maintenance choice. When an equipment is leased the leasing company has a say on how the equipment must be maintain. The biggest disadvantage of purchasing equipment is once the equipment is outdated you are stuck with it (Alexander, 2015). Compare Factors Involved in Leasing and Purchasing Equipment According to Principals and Practices of Public Procurement (2012), it is important to conduct a cost/benefit analysis when determining whether to lease or purchase equipment. Factors to consider when conducing this analysis includes determining...
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...Lease Verses Purchase Paper Jane Jones FIN/370 February 23, 2015 John Doe Lease Verses Purchase Paper When it comes time for a company to make a substantial investment, they are faced with the decision of whether to lease or purchase. Businesses need to take into consideration many factors when they are making these ideal decisions such as; the tax ramifications, time, money and what is best for the growth of the company. It is important to have a financial plan in place that will examine not only the benefits, but also the possible potential losses when making these important decisions. There are many relevant factors to consider in making a lease versus purchase decision. There are the obvious cash outflows to consider such as rent payments or loan payments and initial outlay. There are repairs and maintenance to factor. There are also tax-deductible expenses such as interest payments, tax savings such as depreciation expense to calculate. Other important factors include the duration that the equipment will be in use, the interest rate for a loan, and residual or salvage value of the equipment. Another factor to consider is the production issues that are based on consumer demands for these new products. Customers’ needs continually change so it is important that the right decisions are made that will meet those needs without affecting the organization in a negative way. Under some circumstances, leasing will be the best option while in other instances purchasing will...
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...Comparing and Contrasting Lease verses Purchase Options Bridgette Chambers ACC/400 Accounting for Decision Making November 20, 2013 Frederick Thull Comparing and Contrasting Lease verses Purchase Options In order for one to explain the difference between leases verses purchase option one would need to explain both options. One would explain what is debt financing, and provide two examples. Also, one would need to explain what equity financing is as well as giving two examples and last which alternative capital structure is more advantageous and why. If one decided that they do not wanted to take on investors and wanted total control of the business yourself, one may want to pursue debt financing in order to start up a business. One would tap your own sources of funds first by using personal loans, home equity, and even credit cards. A business loan is another option. Debt financing is when a company borrows money that must be repaid but with interest. This will not affect the ownership of the company. Two examples of such would be Issued Bonds and Line of credit. With a line of credit, this is a bank loan where a business can draw out funds whenever money is needed. In Issue Bonds the business can issue bonds as for of debt financing these bonds are marketable securities. Debt financing allows one to have control of your own destiny regarding the business. If you finance your business using debt, the interest you repay on your loan is tax-deductible. This means that...
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...Introduction 15.1 Objectives 15.2 Concept of Lease Financing 15.3 Meaning of Lease Financing 15.4 Importance of Lease Financing 15.5 Types of Lease Agreements 15.5.1 Financial lease 15.5.2 Operating lease 15.5.3 Sale and lease back 15.5.4 Leveraged leasing 15.5.5 Direct leasing 15.6 Advantages of leasing 15.7 Leasing in India 15.8 Concept & Meaning of Hire purchase 15.9 Difference between Lease Financing and Hire Purchase 15.10 NSIC & Hire Purchase 15.11 Factoring 15.11.1 Factoring procedure 15.11.2 Merits 15.12 Summary 15.13 Glossary 15.14 Self Assessment Questions 15.15 Further Readings 15.0 INTRODUCTION In order to start and sustain a business one needs finance. In the unit one on feasibility study, you have already seen the process of estimating financial requirements. The process involved (a) making a list of all the assets (b) identifying the sources of supply (c) estimating the cost of acquisition when the assets are to be acquired on outright basis. Then investment requirements as well as entrepreneur’s fear will increase. To scare away the entrepreneur’s fear, the emphasis should be given to resources and not to the ownership. In this unit we intend to familiarize you with some important financial innovations i.e., leasing, hire purchase and factoring. 228 15.1 OBJECTIVES After going through this unit you should be able to • Describe the meaning of leasing • Explain the role and importance of lease financing in economic development of a country ...
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...14 March 2011 IASB Agenda reference FASB Agenda reference 5D Staff Paper Contact(s) FASB ED Session March 9, 2011 Michael Gonzales Danielle Zeyher David Humphreys mgonzales@fasb.org dtzeyher@fasb.org dhumphreys@ifrs.org 143 +1 203 956 3478 +1 203 956 5265 +44 20 7246 6916 Project Topic Leases Accounting for Purchase Options Objective 1. The purpose of this paper is to discuss the accounting by lessees and lessors for purchase options included in a lease contract. 2. This paper analyzes the accounting for all purchase options, including both options that the lessee has a significant economic incentive to exercise (which would usually include bargain purchase options) and options that the lessee does not have a significant economic incentive to exercise (which would usually include non-bargain purchase options). 3. This paper is structured as follows: (a) (b) (c) (d) (e) (f) Summary of staff recommendations Summary of the proposals in the leases Exposure Draft Summary of feedback (including comment letters and other outreach) Staff Analysis Staff recommendations Appendix A – preliminary draft wording relating to the accounting for purchase options This paper has been prepared by the technical staff of the IFRS Foundation and the FASB for discussion at a public meeting of the FASB or the IASB. The views expressed in this paper are those of the staff preparing the paper. They do not purport to represent the views of any individual members of the...
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...Lease Finance Lease Finance • Lease is contract between the owner of the asset (Lessor) and the user (Lessee) of the asset, wherein the Lessor gives the right to use the asset to the Lessee for a consideration (Lease Rentals) over an agreed period of time (Lease period or tenure). • At the end of the lease period, the leased asset reverts back to the Lessor, unless the lease is renewed for another term. • Leasing separates the ‘Ownership’ and ‘Usage’ of the asset as two separate economic activities. Leasing 2 Leasing, Hire Purchase, Instalment Sale • Leasing: – Lessor retains the Ownership of the asset & claims the benefit of Depreciation. – Lessee claims the Lease Rentals as tax-deductible expense. • Hire Purchase: – Ownership passes to the Hirer (user) on payment of the last Instalment (on payment of Capital & Interest) and takes benefit of Depreciation and tax-deductibility of the Interest component of the Hire charges. • Instalment Sale: – The legal ownership passes as soon as the 1st instalment is paid. The balance amount is treated as a secured loan and Interest portion is Tax-deductible Leasing 3 Basic Types of Lease • On the basis of the extent to which the risks and rewards incidental to the ownership of the leased assets lie with the Lessor or the Lessee, lease can be classified as: Finance Lease Operating Lease Leasing 4 Finance (or Capital) Lease • Non-cancellable for a specified period called the PRIMARY LEASE Period- usually 5-8 years. • Leased Asset...
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