Description
Finance 565 Disc.
Leasing Decisions (10 points)
Businesses generally own fixed (capital) assets. However, it the ability to use buildings and equipment that is important to the business, not their ownership
Address the following requirements:
What the are the different types of leases?
How can a lease be better the buying the item with capital.
What factors it considers when evaluating a lease?
Leasing Decisions
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Leasing Decisions
Leases are essential financial instruments that provide a means of obtaining the use of an
asset without outright ownership. There are several types of leases, primarily categorized
into operating leases, capital leases (or finance leases), and sale-leaseback arrangements. An
operating lease typically covers short-term rentals where the lessee uses the asset without
bearing the risk of ownership. In contrast, a capital lease is more akin to a purchase and
often involves a long-term arrangement where the lessee may eventually acquire the asset.
A sale-leaseback involves a company selling an asset it owns to another party and then
leasing it back for use, allowing the original owner to free up capital while retaining usage
rights. Each type of lease serves different business needs and financial strategies (Wang &
Richardson, 2020).
Leases can often be a more advantageous option compared to outright purchases. For
businesses, leasing allows them to conserve cash flow, as they avoid the significant initial
expenditure required for buying an asset. This financial flexibility can facilitate investments in
other areas, such as research and development, marketing, or capturing market
opportunities. Leases also offer tax benefits; lease payments can often be deducted as
operating expenses, while loan principal payments on purchased assets are not deductible in
the same manner. Moreover, leasing can provide businesses access to the latest technology
without the hassle of ownership, thus improving operational efficiencies (Merrill, 2020).
Various factors come into play when evaluating whether to enter into a lease agreement.
One of the primary considerations is the total cost of the lease versus the cost of purchasing
the asset outright. A lessee should analyze the long-term implications of lease payments
compared to ownership costs, including depreciation and maintenance expenses.
Additionally, the anticipated use of the asset is crucial; if it’s likely that the asset will become
obsolete or if its usage needs are expected to change quickly, leasing may provide a more
flexible solution. The financial health of the business also matters, as companies may prefer
lease arrangements that align with their cash flow and liquidity needs (Reed, 2024).
The terms and conditions outlined in a lease agreement also play a significant role in the
evaluation process. Key elements such as the lease duration, payment structure, and
potential penalties for early termination or overuse must be scrutinized to determine their
alignment with the business’s operational requirements and risk tolerance. It’s also essential
to consider the asset’s residual value at the end of the lease term; a lower residual value can
lead to higher lease payments, potentially offsetting the financial benefits of leasing.
Understanding the implications of these lease terms will enable a business to make informed
decisions that maximize financial efficiency (Merrill, 2020).
Finally, the strategic goals of the organization should align with the decision to lease versus
buying. Companies focused on innovation may prefer leasing to maintain their competitive
edge through access to the latest equipment without long-term commitment. In contrast,
businesses looking for stability and lower ongoing costs may find purchasing more aligned
with their goals. Overall, while leases provide numerous advantages, the decision should be
made after thorough analysis and consideration of the unique needs and conditions of the
business. This contemplative approach ensures that the chosen financing strategy supports
long-term growth and operational efficiency (Wang & Richardson, 2020).
References
Merrill, T. W. (2020). The Economics of Leasing. Journal of Legal Analysis, 12, 221–272.
Reed. (2024, July 25). Capital/Finance Lease vs. Operating Lease Explained: Differences,
Accounting, & More. FinQuery.
Wang, Y., & Richardson, D. S. (2020). To buy or to lease. EMBO Reports, 21(5), e49971.
MAY DUMYATI
Advantages of Leasing Over Buying
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Advantages of Leasing Over Buying
Efficiently utilizing fixed assets is essential in business. However, ownership of these things is
not always required. A popular substitute that gives companies flexibility without requiring
an initial financial outlay is leasing (Michiels et al., 2021). This essay examines the kinds of
leases, why leasing could be better than purchasing, and the elements companies should
consider when assessing a lease.
Categories of Leases
Although they can take many forms, operating, and finance (capital) leases are the main
categories. Operating leases are brief contracts in which the lessee uses an asset without
taking ownership (Yoon, 2020). The asset’s hazards and maintenance are still the lessor’s
responsibility. This lease is perfect for assets like technology equipment that could soon
become outdated. Finance leases are long-term agreements where the lessee assumes a
large portion of the risks and rewards of ownership (Yoon, 2020). The asset appears on the
lessee’s balance sheet. The lessee can purchase the asset following the lease contract
expiration. Finance leases work well with durable assets.
Potential Benefits of Leasing Over Purchasing
There are several benefits to leasing as opposed to buying with cash. First, it conserves cash
flow by lowering the requirement for sizable upfront payments, freeing up funds for other
expansion initiatives (Michiels et al., 2021). Leasing also offers flexibility, especially regarding
assets that need regular upgrades or grow outdated. For instance, a business that leases
machinery can update to newer versions without worrying about disposing of obsolete
machinery. Additionally, leasing enables organizations to match expenses with revenue
creation over time, spreading out the cost of using an item and making it more manageable
financially, particularly for startups or businesses with little funding.
Considerations While Assessing a Lease
When assessing a lease, businesses must consider interest rates, monthly payments, and
lease terms (Yoon, 2020). The asset’s residual value after the lease is also crucial, along with
maintenance obligations and possible buyout possibilities. Companies should evaluate how
well the lease fits into their budget by contrasting it with the price of purchasing the asset
outright.
In conclusion, leasing is a good choice for companies looking to utilize fixed assets without
the hassles of ownership. Businesses can make well-informed decisions that maximize their
operational flexibility and financial health by knowing the various lease kinds and closely
weighing essential considerations.
References
Michiels, A., Schepers, J., Vandekerkhof, P., & Cirillo, A. (2021). Leasing as an alternative form
of financing within family businesses: The important advisory role of the
accountant. Sustainability, 13(12), 6978.
Yoon, Y. S. (2020). Recognition versus disclosure: Operating lease capitalization and
managerial leasing decisions. Available at SSRN
3689446.
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