Analyzing Lease Versus Buy Decisions" Simulation Summary

967 words - 4 pages

Analyzing Lease Versus Buy Decisions" Simulation SummaryA. For a high-technology item, like computer equipment, is the lease option preferable from the very outset? Why or why not?Yes, because from the start companies are not profitable and do not receive tax breaks. To buy out right can be costly and equipment will need to be upgraded sooner than the old equipment is profitable. Companies will most likely need to upgrade to remain competitive this can be costly for a new company. Also lease down payments are often cheaper than purchase payments. Due to the high rate of obsolescence, high technology assets like computer equipment are frequently leased rather than purchased outright. The lease gives the business the flexibility to acquire the latest technology on a periodic basis. In contrast, a buyer can be locked into a technology by buying it, and must persist with it even after the technology has changed considerably.B. Do factors like down payment and the security deposit that has to be paid upfront on an asset have a major influence on a lease or loan option? Explain your answer.Yes, because down payments and security deposits are paid from company cashand affects cash flow and balance sheets. Loan options often allow anorganization to purchase expensive equipment with-out upfront cost to thecompany. Consider buying a car. You often have to make a sizeable down-payment when you purchase a car. (-2) A down payment and a security deposit paid upfront lower the risk for the lender or lessor. This lowers the present value of the loan or lease related cash outflows for the business acquiring the asset. This in turn lowers the installments that have to be paid on a lease or loan. Depending on the magnitude of the upfront payments made, there can be a significant lowering of the lease or loan payments. However, businesses usually do not have large surplus funds with them for this purpose, which is the reason they require a loan or lease to acquire an asset.C. Under what circumstances is a capital lease a better alternative to an operatinglease?Capital lease is classified and accounted for by a lessee as a purchase and by the lesser as a sale or financing. If it meets any one of the following criteria:the lesser transfers ownership to the lessee at the end of the lease termthe lease contains an option to purchase the asset at a bargain pricethe lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); orthe present value of minimum lease rental.Operating lease is another accounting classification for a lease. A lease that does not meet the criteria for a capital lease is an operating lease. With an operating lease, the lesser is generally taking a risk that at the end of the term...

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