Lease Versus Purchase Paper
Autor: jaidaloraine • January 31, 2016 • Research Paper • 466 Words (2 Pages) • 824 Views
Lease Versus Purchase Paper
Amy Kelly, Christopher Luttrell, Jaida Schupp
L’Tanya Watts, and Scott Garcia
FIN/370
Stephen Beadnell
August 3rd, 2015
Lease Versus Purchase Paper
Introduction
Factors
When a company is deciding whether to lease or purchase an asset, there are several factors to consider. The initial factor should be the life of the asset. In the example provided, the life of the asset was only three years, yet the term of purchase was 5 years. If the company knows they will be selling the asset before it has met the life-term then they need to consider the benefits of lease versus buying. A lease versus buying analysis is typically completed for any capital expenditure, some of the factors included in this analysis include interest, time value of money and depreciation, along with other variable factors. If the company has the intent to keep the asset then purchasing would be the best option. While the company would pay interest on the asset and it would depreciate over time, they would not need to worry about the Time value of money because the asset would remain in their possession.
If the company is not going to keep the asset long term, they may want to consider leasing. In a leasing scenario the company would make lease payments and pay the cost of maintenance on an item. If the business depends on the ever changing technology, then leasing the equipment would be a better option. A lease leaves the business the flexibility to change with the changing technology. The time value of money represents the fact the money is worth more today than it would be in the future. For example, the company choose to purchase the asset today for $100,000 with interest of 7% the value in 1 year will only be $93,457.94 ($100,000/1.07) (Unknown, n.d.). In a purchasing situation this means that the amount the asset can be sold for over time will continue to decrease, in a leasing situation this will not play a part because the company will continue making the same lease payments over the term of the lease.
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