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Lease Versus Buy Essay

1298 words - 5 pages

When an individual is trying to decide whether or not to lease or buy, he or she needs to know the purchase cost, the lease cost, as well as the interest rate of a loan that will be used to purchase the item. The residual value of the item also must be known up front to help determine if leasing is the better option. When determining whether to lease or buy, the cash flow for both should be compared so the best decision can be made. Below is a chart on lease vs buy. (www.smartcomputing.com; Retrieved November 6, 2006)Lease/BuyCash Flow - Usually better from a short-term cash flow perspective. Frees up cash for other purposes while you generate income to pay the leases. You pay less overall but need to have available cash. Financing as an alternative costs more than a lease.Tax Treatment - If properly structured, a lease may give your company a larger expense write-off than a purchase. Consult your tax advisor. Depreciation write-off is based on IRS rules for the type of equipment that you are buying. Consult your tax advisor.Upgrades- Many lease companies let you upgrade to newer equipment during the term of the lease without renegotiating.If you need newer equipment, you are on your own. However, simple upgrades (RAM, hard drive, etc.) cost you only whatever the upgrade is.Equity- At the end of a lease, you don't own the property, and you will need to replace it or buy it from the lease company.You own the equipment and can do with it whatever the needs of your business dictate.Disposal - The lessor is responsible for whatever it costs to dispose of the equipment. You are on to your next set of computers. You can use the equipment for a different purpose within your company, sell it, or pay someone to recycle it for you, but disposal is up to the owner of the equipment.The first scenario is an organization called Bonnesante Research based out of Irvine, California. Bonnesante is set up with Venture Capitalist (VC) Funding. Bonnesante major focus is asset acquisition, which is why the Chief Financial Officer has to weigh the pros and cons of leasing vs buying. Bonnesante's is trying to determine if purchasing or leasing is the better option for a mainframe computer. I chose to lease the mainframe computer because the loan options have a higher outflow whereas the lease option of 18 months with no down payment has the lowest present value of cash outflows. Because the Mainframe would not be used through its entire economic life, it was better for the organization to lease the mainframe. If a loan was acquired to purchase the mainframe, the organization would have to record the purchase on the balance sheet and the depreciation and the interest payments would be recorded as expenses. If the organization was taxed then purchasing the mainframe would be beneficial because the depreciation and the interest payment would lower the outflows.In the second scenario Bonnesante Research is tasked with finding the best option to acquire a spectrometer. The...

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