Week Four Team C Lease Versus Purchase TO UPLOAD
Lease Versus Purchase
NAME HERE
FIN/370
April 20, 2015
Teacher Here
Lease Versus Purchase
When operating a successful business, it is important to consider operating costs and expenses related to producing or being able to provide a certain good or service. In some cases, it is more beneficial for a business to lease equipment needed for production or manufacturing and in other instances it is financially favorable to purchase equipment. This paper will compare the factors involved in deciding whether to purchase or lease equipment.
Types of Leases
The term “lease” is essentially the same as the term “rent”, as both have identical meanings. There are two different types of leases, an operating lease and a financial lease. Both types provide the use of an asset, but with some very different rules. An operating lease is typically used for equipment or vehicles and can be cancelled by the lessee with proper notice. The timeframe of the lease is usually less than the expected life of the item, and will sometimes include a maintenance contract built in. The lessor hopes to either sell the asset or release it at the end of the initial lease.
A financial lease, aka a capital lease, cannot be terminated early. Financial leases also do not include maintenance contracts, and are usually set for the life expectancy of the item. The purpose for the lessor is to gain their initial investment plus a return on the asset, and is thus like debt financing.
Lease vs. Purchase
If a company wants to obtain the usage of an asset such as cash, plant or equipment, without the obligation of purchasing the item, then a lease is the best option. Leases can be classified as short term or long-term debt just depending on the amount of time contracted. The key considerations a company must consider when trying to decided whether to purchase or lease an asset is the net present value of purchasing versus leasing. The factors that affect the value are depreciation, taxes, length of
NAME HERE
FIN/370
April 20, 2015
Teacher Here
Lease Versus Purchase
When operating a successful business, it is important to consider operating costs and expenses related to producing or being able to provide a certain good or service. In some cases, it is more beneficial for a business to lease equipment needed for production or manufacturing and in other instances it is financially favorable to purchase equipment. This paper will compare the factors involved in deciding whether to purchase or lease equipment.
Types of Leases
The term “lease” is essentially the same as the term “rent”, as both have identical meanings. There are two different types of leases, an operating lease and a financial lease. Both types provide the use of an asset, but with some very different rules. An operating lease is typically used for equipment or vehicles and can be cancelled by the lessee with proper notice. The timeframe of the lease is usually less than the expected life of the item, and will sometimes include a maintenance contract built in. The lessor hopes to either sell the asset or release it at the end of the initial lease.
A financial lease, aka a capital lease, cannot be terminated early. Financial leases also do not include maintenance contracts, and are usually set for the life expectancy of the item. The purpose for the lessor is to gain their initial investment plus a return on the asset, and is thus like debt financing.
Lease vs. Purchase
If a company wants to obtain the usage of an asset such as cash, plant or equipment, without the obligation of purchasing the item, then a lease is the best option. Leases can be classified as short term or long-term debt just depending on the amount of time contracted. The key considerations a company must consider when trying to decided whether to purchase or lease an asset is the net present value of purchasing versus leasing. The factors that affect the value are depreciation, taxes, length of
References: Financial Dictionary. (2015). Retrieved from http://financial-dictionary.thefreedictionary.com Mayo, H. B. (2012). Basic finance: An introduction to financial institutions, investments, and management (10th ed.). Mason, OH: South-Western. Newman, P. (2006). Leasing vs Buying: Which is Best for You?. Retrieved from http://www.entrepreneur.com/article/169332 Present Value of a Single Sum of Money. (2013). Retrieved from http://accountingexplained.com/misc/tvm/pv-single-sum