Friendly Foods Case
The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions
Lease
Leases are contractual arrangements by which the owner of property (the "lessor") allows another person (the "lessee") to use the property for a stated period of time in exchange for cash payments or other compensation. The lessee treats Capital leases as the acquisition of assets and the incurrence of obligations. Therefore it is similar to buying of asset. Still some difference is there:
While the most cost-effective alternative is preferred, non-financial factors such as obsolescence and risk need to be considered as part of the buy versus lease decision.
For businesses, capital-leasing property may have significant financial benefits:
Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property outright.
Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the property market has shown steady growth over time.
Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.
When controlling cash flow is critical and you don't have time to worry about your equipment, leasing can be a great option
If the obsolescence risk is high then lease will be
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions
Lease
Leases are contractual arrangements by which the owner of property (the "lessor") allows another person (the "lessee") to use the property for a stated period of time in exchange for cash payments or other compensation. The lessee treats Capital leases as the acquisition of assets and the incurrence of obligations. Therefore it is similar to buying of asset. Still some difference is there:
While the most cost-effective alternative is preferred, non-financial factors such as obsolescence and risk need to be considered as part of the buy versus lease decision.
For businesses, capital-leasing property may have significant financial benefits:
Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property outright.
Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the property market has shown steady growth over time.
Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.
When controlling cash flow is critical and you don't have time to worry about your equipment, leasing can be a great option
If the obsolescence risk is high then lease will be