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Analzing Lease Simulation Essay

1481 words - 6 pages

The simulation “Analyzing Lease vs. Buy Decisions” is a simulation that walks a person through a research company, Bonnesante Research Company out of California. As the CEO of the company, the CEO must select to optimal mode of financing the company’s acquisitions. This will be shown by a brief scenario’s of each section, the CEO’s recommendations and to summarize the different capital budgeting concepts addressed from the simulation to answer multiple questions that are addressed in the simulation to ensure that both leasing and buying options are considered completely before the final decision is made by the CEO of Bonnesante Research Company.Scenario 1Bonnesante Research is a start up business in Irvine, California focusing on biotech, andis based on 30 employees. As it grows, company’s asset acquisition needs to be focused.Bonnesante needs to submit its first drug to Food and Drug Administration within six months. Inorder to run advanced analytical software for the preparation of the drug, it needs to acquire themainframe computer. Now the decision needs to be taken to either lease or buy the mainframecomputer.Solution 1As a CFO of Bonnesante Research company, by taking my colleagues opinion intoconsideration, the CEO has decided to lease the mainframe computer for 18 months instead ofbuying the mainframe computer. The reason being is that the loan options were proposingsignificantly higher outflows and the leasing option of 18 month with no money down proposedthe lowest present value of the cash outflows of the interval.Since Bonnesante is not a profitable company due to this reason the expenses for buying an assetwill not be tax deductible and loaning option will also require to record the transaction andcorresponding liability on the balance sheet. Through the operating lease option an asset willnot need to be reported on balance sheet. Then the technology can be outdated in the futureand there could be a need of upgrading it. This will show the reason that operating lease is thefirst choice that a company has at this time and place.Scenario 2The next scenario is that the Bonnesante requires an advanced spectrometer for itsResearch and Development program. The cost of this spectrometer is $2,000,000 butBonnesante is now operating as a profitable firm. The options are to do a short term operatinglease, a long-term capital lease or to buy the spectrometer.Solution 2Since Bonnesante is running as a profitable company and the need of spectrometeris a large asset for a company to have in Research and Development field and will not beobsolete. This will be used through its entire economic life which is five years and to the reason to buying spectrometer on a 40 year loan to be able to have the down payment of $113,608 seems to be a good decision. By buying this asset, Bonnesante will also have a benefit of claiming it as an asset depreciation whereas it will not be an option in operating lease since in the leasing...

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