Comparing Leasing Versus Purchasing - Essay Example

 Lease versus Purchase There are various options available when a person needs to obtain an asset and two of the most common ones include outright purchase and leasing. With that being said, there are multiple factors which must be taken into consideration when deciding if the required asset should be leased or purchased. Availability of money is the first and foremost factor that we need to consider when making such a decision. If for instance a Company needs to buy machinery and it does not have enough capital and neither is it willing to take a loan, then in such a scenario it would be essential if the company goes for a lease since it requires much less payment to be made up front, with the remainder being paid later.

Secondly, lease financing and outright purchases have different tax implications, with some countries allowing tax credits to companies who make outright purchases. This of course could be a game changer as many companies could make saving their tax bill a priority and thereby resultantly make outright purchases rather than going for a lease (Cockburn, 2010). Another key factor that determines purchase and lease decisions is the time value of money. A dollar’s worth today would not be the same twenty years from today.

When deciding to make an expensive purchase, time value of money concept is used to compute the future value of a project to aid comparison. For instance, we can either make an outright purchase of equipment by paying $200,000 up-front or we can finance it with a lease of $55,000 per annum. Assuming interest rate to be 10% as in the example, after three years the future value of outright purchase totals $101,281 while the future value of leasing totals $90,892. These values differ due to many factors (which also affect the purchase versus lease decision) including maintenance cost (with maintenance being paid by the buyer in case of purchase and with either lessor or lessee being responsible for the maintenance), interest payment of loans (in case a loan is taken to make the outright purchase) and tax savings on lease.

In the given scenario, time value of money tells us that it would be cheaper to lease the asset rather than buying it up-front. All these factors should carefully be considered in making the final decision, namely: cash flow requirement, service requirement and life of the equipment. ReferenceCockburn, D. W. (2010). Commercial leases. Haywards Heath: Bloomsbury Professional.