Lease Versus Purchase Essay

When operate a successful condescension, it is important to consider operating costs and expenses tie in to producing or being able to provide a certain high-priced or service. In rightful(prenominal) about cases, it is more beneficial for a business to enlist equipment needed for production or manufacturing and in other instances it is financially favorable to purchase equipment. This paper will compare the factors involved in deciding whether to purchase or need equipment.Types of LeasesThe term ask is essentially the same as the term rent, as both keep back identical meanings. There are two different types of leases, an operating lease and a financial lease. Both types provide the use of an plus, but with some very different rules. An operating lease is typically used for equipment or vehicles and kindle be basincelled by the lessee with proper nonice. The timeframe of the lease is normally less than the expected feeling of the item, and will sometimes include a maintenance contract built in. The lessor hopes to either sell the asset or release it at the end of the initial lease. A financial lease, aka a capital lease, cannot be terminated early. fiscal leases also do not include maintenance contracts, and are usually set for the life prevision of the item. The purpose for the lessor is to gain their initial investment plus a restoration on the asset, and is thus like debt financing.Lease vs. PurchaseIf a smart set wants to obtain the usage of an asset such as cash, plant or equipment, without the obligation of purchasing the item, then(prenominal) a lease is the best option. Leases can be classified as short term or long-term debt just figureing on the amount of time contracted. The key considerations a familiarity must consider when trying to decided whether to purchase or lease an asset is the net present cherish of purchasing versus leasing. The factors that affect the think of are depreciation, valuatees, length of lease paymen ts, life span of asset, and whatever eternal rest or salvage foster of the asset. Leases are accounted for on a troupes balance sheet as long as cardinal of the following occurs the lease transfers ownership at the expiration, the lessee may buy the asset below its value at the expiration, length of lease is more then 75 percent of the expected life span, or the present lease payments exceeds 90 percent of the fair market value of the property (Mayo, 2012). monetary leases though, must be capitalized where as operating leases may not bugger off to be placed on the balance sheet, but should be renowned in the footnotes. Even though financial leasing may sound alike to debt financing of an asset, keep in mind that the lessor will obtain any residual value of the asset, whereas if purchased, the salvage value would remain with the purchaser. Leasing offers high(prenominal) tax deductions, but potentially understates a companies assets. Purchasing usually requires a higher initi al cash outlay (Newman, 2006), but may offer higher assets and better return on investment in the long run. ascertain which option of leasing or buying is better will ultimately depend on the time value of money (Mayo, 2012). Application of Time mensurate/Money Concepts in Evaluating Lease vs. Purchase Decisions When deciding on whether on whether to lease or purchase assets for your company, there are a few different factors to consider.One of those important factors is the time value of money. According to Financial Dictionary the time value of money can be specify as the idea that a dollar today is worth more than a dollar in the future, because the dollar trustworthy today can earn interest up until the time the future dollar is received (2015). To determine which option, leasing or purchasing, would be financially beneficial for the business, the present value of each should be calculated. The present value formula will divulge you the cash flows associated with leasing or purchasing the asset (Mayo, 2012). To calculate the present value of a single sum of money one would divide the hereafter Value (FV) by (1 + i)n where i is the interest rate per compounding utmost and n are the number of compounding periods (Present Value Of A Single Sum Of Money, 2013).ConclusionThere are umteen factors and applications to consider when making the decision between leasing and purchasing. Factors such as the assets life expectancy, companys tax bracket, and payment schedule are just a few to be considered when determining which option is best for a company. Understanding the time value of money, is just one of the few considerations a company must review so that its financial officers can constrain educated business decisions.ReferencesFinancial Dictionary. (2015). Retrieved from http//financial-dictionary.thefreedictionary.com Mayo, H. B. (2012). Basic finance An introduction to financial institutions, investments, and management (10th ed.). Mason, OH South-We stern. Newman, P. (2006). Leasing vs Buying Which is Best for You?. Retrieved from http//www.entrepreneur.com/article/169332 Present Value of a Single Sum of Money. (2013). Retrieved from http//accountingexplained.com/misc/tvm/pv-single-sum