Analyzing Lease vs. Buy Decisions
There are several matters which the manager must consider when making the purchase or buying decision, and this decision must be consulted with financial manager also. The first matter is the holding period for which the company expects to use the machine, for example, and thus the optimal time for which the company needs it. Once the servicing term is decided upon, the matter whether the asset can be resold upon finishing the usage term, or whether the asset will have already lost its' value by that time must be analyzed. There are several risks with purchasing versus lending a machine. Though in theory it is easy to make this analysis, in practice the machine can become obsolete very fast and unexpectedly and the competitive advantage of using this machine within production cycle will have been lost. Another risk is the economic risk, or th
e fact that the company can lose its' business and the income will not be any longer sufficient to pay out the credit if the machine is purchased. While the operating lease is accounted for as operational expenses and are computed employing the risk rate reflecting rather unsecured and risky debt. Leasing has taxation benefits and the company has more operational capital as it does not incur high down payments which it would in case if it purchases equipment. Under the uncertainties of future company performance due to legal, political or industry instability, or due to low industry attractiveness and thus low profit possible to be made, or if the business involves high risks, leasing is more flexible decision for the company. Also, NPV can be affected by inflation heavily. Capital lease assumes that the company leases an asset for a term greater than 75% of its' production life, the lessee can have the right to purchase the machine upon the lease expiry and the net present value of the lease payments is usually lower than the 100% market value of the asset leased. Also, the difference is in accounting calculation of the net present value of the assets under operational and capital lease. Thus, the company saves itself cash. But in case of purchase, the interest rate can be variable and thus payment may differ with shifts in interest rates. Thus, the company can deduct its taxable income by the depreciation of the asset under a capital lease, and it can also deduct taxable income by interest expenses if the company borrows to capital lease an asset. On the other hand, in case of high economic downturn risk, the lease decision is better as it will allow the company simply to return the machine if the firm cannot afford it no longer. Another benefit comes from accounting differences in treating operating versus capital leases. When computing the net present value of outflows in case the machine is rented, the rental payments may be certain for some period as the rent can be fixed during the period contract is signed. The decision to lease versus to buy is magnified in cases when the equipment possesses such qualities, as it can become obsolete very fast and thus the purchase decision will not be financially optimal.
Common topics in this essay:
,
capital lease,
net value,
deduct taxable income,
deduct taxable,
taxable income,
operational capital,
obsolete fast,
|
Acceptance Essays
