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Barns & Noble

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Build a Bear Inc.

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a. Why do companies lease assets rather than buy them? 1. Companies lease long-term assets rather than buy them for many reasons. The tax benefits are greater such as, most lease payments can be fully deducted in the year you paid them, whereas major equipment purchases may have to be depreciated over several years. Since your money will likely be tighter in the beginning months and years of your business, the ability to offset lease expenses against your initial investments may help you greatly at tax time. Leases offer more flexibility in terms of adjusting to changes in technology and capacity needs. When you buy something, even if your needs change or better technology becomes available, your investment is tied up in the purchased item. Leasing may allow you to update or replace your equipment or furniture when you need to, or even get rid of the commitment if you no longer need the item. Leased equipment usually includes ongoing support, maintenance, upgrading, and possibly even training for you and your staff. Lease payments create the same kind of obligation that interest payments on debt create, and have to be viewed in a similar light. Lastly, Leasing can give a business Lower start-up costs can give you more time to get settled into the marketplace and get the word out about your products and services, giving you a much better chance of surviving those risky first years. b. What is an operating lease? What is a capital lease? What is a direct-financial lease? What is a sales-type lease? (Hint: if your textbook does not cover the lease complexities, use your favorite Internet search engine to find definitions and examples.) 1. Operating lease- A contract that allows for the use of an asset, but does not convey rights of ownership of the asset. An operating lease is not

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