Lease vs Purchase

In: Business and Management

Submitted By msrose320
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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 an excellent idea for any company to consider. Leasing provided the company the option of upgrading the asset that allows them to remain competitive. Leasing also is less expense up front because of the established payments and eliminated the large lump sum to purchase. The company’s 40% tax bracket is also a plus for leasing because leasing is often 100% tax deductible which creates…...

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