Business

Leasing Versus Purchasing

Ashley Covington, Shannelle Logan, Yonatan Shiachi & Majida Ismaili Alaoui

FIN 370

July 18th, 2015

Tony Moses

Leasing Versus Purchasing

Introduction

Companies decide everyday on how to invest working capital in either purchasing or leasing new equipment. Factoring in taxes and timing incoming and outgoing cash flows will help a firm analyze what is the best way to go as in the example below. The cost of the capital equipment is also considered a key factor. Some capital products are too expensive to be purchased. These factors shall be focused on the discussion sections.

Deciding Factors

In the example provided, the firm must decide how to acquire a new asset that costs $200,000. The timing of cash inflows and cash outflows must be examined to ensure that the company is capable of making either the loan payments or mortgage payments when they are due. Also, firms analyze whether the tax benefit is more favorable with either leasing or purchasing. In this case, over the course of three years, leasing would provide a tax benefit of $72,000. Whereas, owning the equipment, provides a tax saving of $61,800 during the first three years. Finally, maintenance and depreciation cost are evaluated because they can lower the value of the asset and cause cash outflows to increase. Any firm that is faced with the decision to lease or purchase should analyze the factors presented above in a spreadsheet format to determine the present value net cash outflow of the asset per year. By calculating net cash outflows for the present value, financial advisors can determine the present value of the cost of leasing. In this instance, the present value cost of owning is $10,389 more than that of leasing. Therefore, leasing is the preferred method to financing this firm’s investment.

Conclusion

It is easy to see that when a company has a decision to make, whether to purchase or lease equipment or property,...