There can be a number of factors that could affect a lease or buy decision, such as budgets or time constraints; therefore, when making a decision we all must weigh the advantages and disadvantages of leasing versus buying options and their impacts on the costs and schedule. This paper will examine and assess the lease versus buy option by including a description, and an analysis that will include the advantages and disadvantages of lease versus buy. Finally, based on our findings in this paper, we will highlight the reason (s) for selecting one over the other.
The factors to keep in mind when buying are easy to identify, it is deciding whether to proceed with the purchase that is difficult. The loan in the problem is for 200,000 dollars, and it is for a rate of 10% in interest. When you think about purchasing rather than leasing you need to identify what the companies most profitable outcome would be. Leasing the equipment is 55,000 dollars with an initial maintenance of 5,000 dollars with the $1,000 hike every year following the first year. The benefit here would be to buy it out right because you have a $40,000 a year payment with 10% interest due on the remaining balance that is due at the end of the year. The overall payment is 40,000 in interest, and the firm plans on selling the equipment for $55,000 at the end of the loan that in turn gives some of their money back to them. So to break it down even further there is an interest payment at the end of year one of 16,000(56,000), year two; 12,000(52,000), year three 8,000 (48,000), and year 4 4,000 (44,000) the payment in a lease is steady at the 55,000 per year with the growing maintenance per year which make the lease good, but for those who cannot quite afford to take out a full loan of 200,000 for the equipment.
Leasing is the option to use the asset without obtaining the title or rights to the asset. In return for the use of the asset, the lessee enters into a contractual agreement with the titleholder or owner of the asset to pay for the use of the asset. It is a viable option for an organization that may not wish to invest fully in operating assets such as equipment, machines, and vehicles. It is also an option for organizations, who do not have the funds to initially apply, place a deposit or down payment on the item. Two types of leasing options are available which are an operating lease and a financial lease. In this situation, an operating lease would be the most effective way to use the asset without having to invest in the depreciation of the equipment.
Leasing equipment agreements will have the cost for maintenance of the equipment built into the contract. In addition, the lease will terminate prior to the full lifetime of the asset or equipment (Mayo, 2012). This allows the organization leasing the equipment to have the option to upgrade to newer equipment as the time passes and not need to worry about selling the previous equipment prior to making a change. The burden of a used piece of equipment is no longer theirs to carry; the asset continues to work in a positive way for the organization and the cost to maintain the equipment is directly within the agreement. Leasing is the most appropriate option for this specific scenario.
We looked over a number of factors that affected the make-or-buy (lease or buy) decisions such as budget, scope, or time constraints; therefore, when we made our decision to lease instead of buy we weighed all advantages and disadvantages. We examined and assessed the lease versus buy option.
Mayo, H. B. (2012). Intermediate-Term Debt and Leasing. Basic Finance: An Introduction to Institutions, Investments, and Management (Tenth Edition ed., p. 584). Mason: Cenage Learning.