Analyzing Lease Vs. Buy Decisions Simulation

1291 words - 5 pages

Deciding whether to lease or buy is a decision most companies face when having to acquire new assets or take on additional liabilities. The ultimate goal is to make the most cost-effective choice that will best benefit the company and its stakeholders. To do so, those making the decisions need to be aware of details such as the life expectancy of equipment or machinery to be acquired, the point at which the item becomes obsolete, and if purchased, what impact will the purchase have to the company’s financial standing. Understanding the advantages of buying compared to leasing along with calculating the after-tax outflows, will aid the lease versus buy decision-making process.Scenario Bonnesante Research is a biotech start-up company based out of Irvine, California that is targeting their anti-infective drug division for growth. The company is faced with three major decisions on asset acquisitions and financing that requires a decision on whether or not to lease or buy the assets. They need to determine the appropriate action to acquire a new mainframe computer and an advanced digital spectrometer. They also need to determine whether or not to buy or lease a plant and complete facility upgrades as part of the transformation into a pharmaceutical company.Recommended solutions the first decision the company is facing is the acquisition of a Mainframe computer to be used to run the complexed analytical software. The computer can be purchased outright or via an operating lease. In analyzing the options, the best course of action appeared to be leasing the computer and not purchasing it. Selecting the option of the 18-month lease with no money down had the lowest present value of cash outflow. (Financial Analysis, 2007). Computers quickly become outdated and the company may have a need to replace or upgrade the mainframe within the 18 months. By having the lease, the company has more flexibility in their future decisions on upgrades or replacement. Also, knowing that the company is not taxed, they would not be able to take advantage of the tax deductions on depreciation and interest payments.The second decision needing to be made is whether to lease or buy an advanced digital spectrometer. The equipment has a price tag of about $2 million. The options available to the company are lease via operating lease, lease via capital lease, or loan to purchase the equipment outright. The company could select a 40-month operating lease with a down payment of $84,683. The present value of the after-tax cash flow is very low at $1,781,000. However, this is not the best benefit for the company. Upon further analysis, the preferred option is purchasing the spectrometer using a loan of 40 months with two months down payment. This option has the lowest present value and offers the best benefit to the company. The economic life of the equipment is at least five years and there is no threat of obsolescence which allows the company to use the assets for its entire...

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