Lease Vs Purchase Research Paper
Lease versus Purchase Paper
Yolando L. Carson, Galen Powell, Megen Smith, & Tracy Coutee
FIN/370
November 18, 2014
Louis Wallen
Lease versus Purchase Paper The choice to lease versus purchase is a crucial financial consideration for businesses of all sizes. When comparing the factors involved in deciding whether to purchase or lease equipment for a firm, one must first have a clear understanding of the value in making a purchase verses a lease. In order to make the ideal decision, it is imperative for the firm to analyze the tax savings and the time value of money (TVM) principle on future cash flows. This decision is made by evaluating the time value of money for said equipment for the allotted period of time. With this information …show more content…
With that being said, when a firm calculates the present value of cash outflows/inflows from owning equipment as $101,281 and $90,892 from leasing equipment; the better choice in regards to cost after the allotted three years would be to lease. The depreciation of the equipment over time will cost the firm more when using the option to purchase over leasing because the value of the equipment will not be the same upon resale which will cause a loss to the firm.
Calculations
Cash Outflows/Inflows Associated with Leasing
Year Lease payments 1 $55,000 2 55,000 3 55,000 Maintenance 1 5,000 2 6,000 3 7,000 Total tax-deductible expenses 1 60,000 2 61,000 3 62,000 Tax savings 1 24,000 2 24,400 3 24,800 After-tax net cash outflow from leasing 1 36,000 2 36,600 3 37,200
Present value of the cost of leasing (using the 10 percent interest rate):
$36,000(0.909) + $36,600(0.826) + $37,200(0.751) = $90,892
Cash Outflows/Inflows Associated with Owning
Year
1
2
3
4
5
Maintenance
$ 5,000
5,000
5,000
Depreciation
40,000
60,000
40,000
Not applicable
Interest
20,000
16,000
Yolando L. Carson, Galen Powell, Megen Smith, & Tracy Coutee
FIN/370
November 18, 2014
Louis Wallen
Lease versus Purchase Paper The choice to lease versus purchase is a crucial financial consideration for businesses of all sizes. When comparing the factors involved in deciding whether to purchase or lease equipment for a firm, one must first have a clear understanding of the value in making a purchase verses a lease. In order to make the ideal decision, it is imperative for the firm to analyze the tax savings and the time value of money (TVM) principle on future cash flows. This decision is made by evaluating the time value of money for said equipment for the allotted period of time. With this information …show more content…
With that being said, when a firm calculates the present value of cash outflows/inflows from owning equipment as $101,281 and $90,892 from leasing equipment; the better choice in regards to cost after the allotted three years would be to lease. The depreciation of the equipment over time will cost the firm more when using the option to purchase over leasing because the value of the equipment will not be the same upon resale which will cause a loss to the firm.
Calculations
Cash Outflows/Inflows Associated with Leasing
Year Lease payments 1 $55,000 2 55,000 3 55,000 Maintenance 1 5,000 2 6,000 3 7,000 Total tax-deductible expenses 1 60,000 2 61,000 3 62,000 Tax savings 1 24,000 2 24,400 3 24,800 After-tax net cash outflow from leasing 1 36,000 2 36,600 3 37,200
Present value of the cost of leasing (using the 10 percent interest rate):
$36,000(0.909) + $36,600(0.826) + $37,200(0.751) = $90,892
Cash Outflows/Inflows Associated with Owning
Year
1
2
3
4
5
Maintenance
$ 5,000
5,000
5,000
Depreciation
40,000
60,000
40,000
Not applicable
Interest
20,000
16,000