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Category: Business and Industry
Date Submitted: 01/18/2015 09:24 AM
Lease vs Purchase
Eric Burnham, Mitchell Jimenez, Vivianna Salcido,
Dilesky Curiel, Ramon Diaz, Zenon Mykytyn
FIN/370
November 24, 2014
Laura Haase
Lease vs Purchase
There are some significant differences between leasing and purchasing. Leasing is basically a contract that outlines the terms under which an individual or organization agrees to rent a particular asset (such as land or buildings, equipment, vehicles, etc.). A lease guarantees the lessee or renter the use of an asset and guarantees the owner of this asset regular payments for a specified amount of cash and time period. In the other hand, purchase is the process of obtain an article (goods or services) in exchange for money or its equivalent. It is simply the act of buying.
There are many factors that should be taken into consideration when leasing or purchasing equipment. This includes depreciation of equipment over time, which is defined as the decline in asset value over time, amount of upfront money required to lease or buy, and the impact on the financial balance sheet. That being said, after reviewing and considering all the facts presented in our class text scenario, we came to the conclusion that in this particular situation the best thing was to do is lease.
If a company chooses to obtain full ownership of the equipment using loan financing, it will be required to depreciate the value of the asset over its useful life. In addition, loan payments with annual interest must be remitted to the lender. GAAP defines depreciation as an operating expense and will reduce the company’s taxable income. In the textbook example, the purchase price of the equipment is $200,000 and the company plans on selling it for $50,000 after 3 years of usage. By purchasing the asset, the firm will be able to deduct depreciation and maintenance expenses from its taxable income during these 3 years.
The alternative of leasing the equipment at $55,000 over the 5 years will require maintenance...