Beardsly Service Co. Financial Statement

Learning Team A Lease Versus Purchase Paper

University of Phoenix

FIN/370

January 11, 2014

Learning Team A Lease Versus Purchase Paper

When deciding when to lease versus purchase companies and individuals have many factors to consider. Determining which option is best depends on several factors. This paper will discuss the details about leasing and purchasing, the cost associated with each, and which option is best based upon the information in the equation.

When a company is looking at purchasing or leasing something such as equipment, it must determine which method of obtaining the equipment is the least costly for the company. Purchasing of equipment is sometimes achieved through term loans. Term loans are a form of intermediate debt. Term loans often require the company to put money towards the purchase of the equipment, they are also usually secured with equipment or real estate. Term loan payments are typically set up with period payments similar to a mortgage. Term loans may also have restrictive covenants that are negotiated between the financer and the borrower. These can typically include, minimum current ratio, minimum amount of net working capital, and periodic financial statements from the borrower. Though there could be any number of restrictive covenants since these are negotiated uniquely for every term loan.

Leases are a form of renting, and the terms are often interchanged in terminology. Leases are a form of intermediate debt, and are generally for the use of equipment for the company. Leases can cover any amount of time. There are two types of leases; an operating lease, and a financial lease. An operating lease is generally for the lease of equipment and vehicles, and may include maintenance for the equipment built into the lease. Financial leases are different from operating leases and are expected to include a return for the lessor. Financial leases also do not include maintenance, are for the life of the equipment, and are not...