...No. 1339 Information Sheet August 2001 Should I Lease or Buy? Steven W. Martin, Fred Cooke, Jr., David Parvin, and Scott Stiles I NTRODUCTION For many farms, machinery expense is the largest single production expense (Massey). Under current farm financial conditions, producers must search every avenue for opportunities to minimize costs and maximize returns. Producers have three basic options for meeting machinery needs: purchase the needed equipment, lease the needed equipment, or custom hire. Custom hire may work well for certain jobs, but often does not allow the amount of control many operations require. Like purchasing, leasing allows the producer to maintain control of the timeliness and quality of the work conducted on his or her farming operation. Therefore producers should evaluate leasing versus purchasing based on the economic opportunities that each provides. OVERVIEW Most leases consist of four basic components: • Periodic payment • Length of lease • Amount of use (hours, miles, etc.) • Residual Under a standard lease agreement, the lessee (farmer) agrees to pay the lessor (bank, credit corporation, dealer, etc.) a specified amount (payment) at certain intervals over a certain length of time. Three-year leases with annual payments are very common, but any arrangement is possible. The lease will generally specify the amount of annual use permitted under the base contract. Tractor leases often range from 300 to 1200 hours of annual use. The amount...
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...When one is in the process of purchasing a car there are several factors that must be considered before doing so. These factors will be discussed throughout this paper. When one decides what kind of car and how much one can afford one should then decide if leasing or buying would be better for him or her. There are several options that can be considered in making this decision. The auto calculator will help in making this decision. One will put all of the information about the vehicle in the calculator to determine which would be best for him or her at this time. When determining if leasing a vehicle would be best, one would need the information about the cost of the lease, how long the lease if for, and the terms of the lease. One will need to negotiate the terms of the lease to make it better for him or her. After he or she has come up with those figures one should then consider the options of buying a car. To determine if buying a car is best he or she should consider the buying price, discuss the terms of the contract, and decide how the car would be financed and how long it would be financed for. After all of this information has been put into the auto calculator one should then be able to determine which option would be best for him or her. The auto calculator make recommendations about which option would save the most money over the time period allotted. I have always thought that buying was the best option for purchasing a car, but that is not always what...
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...Contents Lease Vs. Buy Laid in Excel Spreadsheet1 Advantages to Lease Vs. Buy 2 Advantages of Using a Longer Time Table Rather Than Shorter 3 Real Estate Depreciation 4 Works Cited………………………………………………………………………………………………………………………………….……….5 Excel Spreadsheet Showing Table and Work. Advantages of Lease Vs. Buy The decision to lease or buy equipment or real estate is very important one. One of the most obvious draw backs to leasing versus buying is that, at the end of the lease, the organization does not own the equipment or real estate. The primary advantage to leasing is that it conserves cash for other business operations. Additionally, leasing allows the organization to expense some of the maintanence costs and provides superior tax benefits. Leasing allows for the organization to more efficiently keep up with technology advantages. In reference to real estate, the lease offers the option to change locations if necessary. Moreover, many of the maintenance costs fall on the owner and not the leaser. (Park, 2011) Advantages of Using a Longer Time Table Rather Than Shorter Particularly with real estate investments, a longer period than the four years used in this scenario might prove to be more accurate. While the real estate market is not particularly good now, a change in that area might make the initial investment actually have returns. The cyclical nature of this particular market may contribute to a more favorable outcome in the lease versus buy examination...
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...Vehicle The great debate to lease or buy a car? Which one of the two options is the smarter or he better choice? The answer to this question is both and neither are the best options. Confusing one may think so, however, the best way to get to the answer is to ask yourself what is important to you. Every person is different with different values and priorities that determine for them whether leasing or buying is the answer. There are people who desire to drive a new vehicle every few years with little or no maintenance costs. Some people have a strong desire to own the vehicle, as opposed to lower upfront costs with no ownership. One of the two of the biggest temptations for many people to lease verses buying are that the monthly costs to lease are cheaper than the monthly payments to buy a car. The other is that they are able to have a new car every 2-3 years, as opposed to the people who purchase. People who purchase generally hold on to the car for an additional 2 years after the last car payment. Let’s review the pros and cons of leasing. The advantages of leasing are it offers lower monthly payment and the ability to drive a new car with all the new bells and whistles every 2-3 years (ehow). There is a tax benefit of paying lower taxes since the individual is paying the taxes on the monthly payments verses the full value of the car. From the two examples so far it appears that leasing is a great situation, and everyone should lease; once again maybe we will look...
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...SEMINAR MANAJEMEN KEUANGAN Primus Automation Division Disusun Oleh : KP A Roy Sutanto 3122103 Andrena Novita Santoso 3122137 FAKULTAS BISNIS DAN EKONOMIKA UNIVERSITAS SURABAYA SEMESTER GENAP 2014 / 2015 Statement of Authorship “Saya/kami yang bertandatangan dibawah ini menyatakan bahwa makalah/tugas terlampir adalah murni hasil pekerjaan saya/kami sendiri. Tidak ada pekerjaan orang lain yang saya/kami gunakan tanpa menyebutkan sumbernya. Materi ini tidak/belum pernah disajikan/digunakan sebagai bahan untuk makalah/tugas pada mata ajaran lain kecuali saya/kami menyatakan dengan jelas bahwa saya/kami menyatakan dengan jelas menggunakannya. Saya/kami memahami bahwa tugas yang saya/kami kumpulkan ini dapat diperbanyak dan atau dikomunikasikan untuk tujuan mendeteksi adanya plagiarisme.” Nama | NRP | Roy Sutanto | 3122103 | Andrena Novita Santoso | 3122137 | Mata Ajaran : Seminar Manajemen Keuangan Judul Makalah/Tugas : Primus Automation Division Tanggal : 17 Mei 2015 Dosen : Dr. Putu Anom Mahadwartha Dr. Deddy Marciano Bertha Silvia Sutejo SE., Msi Tannudin SE., MM. Surabaya, 17 Mei 2015 (Roy Sutanto) Ketua Kelompok A. ALUR CERITA Pada awal tahun 2002, Tom Baumann, seorang analis di Pemasaran dan Penjualan Group dari divisi otomasi prerusahaan Primus, harus merekomendasikan kepada manajer divisi penjualan, Jim Feldman, syarat-syarat yang Primus akan menyewa salah satu sistem canggih untuk Avantjet corporation...
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...Airlines (HKDA) was formed to evaluate the alternatives available to replace a spare engine. There are three options available to them. a. The first option is to buy the engine. They would have to place an order with the IAE and expect to get the engine in late 2007. However the cost of engine will be escalated (3-5%) and there was no full proof way to determine the exact cost of purchase of engine. As the cost of the engine was around $4.5M such an escalation was harmful for the company. b. The second option was to sale and lease back wherein the company had already consulted and arranged for another engine lease company to buy the engine from them and give them in lease. The rent would be 0.8% of the purchase price however there are some complications regarding the maintenance cost as the lease company bearing the cost of maintenance has put some constraints on HKDA. c. The third option was to simply lease from the concerned company however there was a long queue for taking the lease as the engine was a popular model and lease company was ready to buy the engine only if HKDA assured them that they would take up the engine therefore leading them to only two choices. HKDA needs to consider the relevant cash flows and the discount rate for those cash flows in order to decide whether to buy or lease the spare engine. For the purchase option the cost of capital to firm should be used as company is not going for new debt or equity but using its internal cash. This...
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...Lease Financing Brigham and Daves Ch. 19 Christopher B. Alt CFA PhD Topics in Chapter Types of leases Tax treatment of leases Effects on financial statements Lessee’s analysis Lessor’s analysis Other issues in lease analysis 2 Who Are the Two Parties to a Lease Transaction? The lessee, who uses the asset and makes the lease, or rental, payments The lessor, who owns the asset and receives the rental payments Note that the lease decision is: a financing decision for the lessee, but an investment decision for the lessor 3 Primary Lease Types Operating lease – Short-term (asset is not fully amortized) and normally cancelable – Maintenance usually included Financial lease – Long-term (asset is fully amortized) and normally noncancelable – Maintenance usually not included – Lessee usually pays property taxes and insurance (hence, a “net, net” lease to the lessor) Sale and leaseback – Similar to financial lease, except equipment is used, not new, and lessor buys equipment from user-lessee, not manufacturer/distributor 4 Primary Lease Types Combination lease – Hybrid lease which contains some features of both operating and financial leases (e.g. financial lease with a cancelation clause) "Synthetic" lease – Used by firms (Enron,Tyco) to acquire LT assets but keep debt off balance sheet Firm SPE leases asset to firm for 3-5 year term records transaction Firm SPE Special Financial Purpose...
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...LEASE OR FINANCE?? In today’s competitive economy, a vehicle is no longer considered a luxury anymore, but rather a necessity. There are not very many cities in the U.S. where you can live without car. I live in Orlando, Florida and dependable transportation is a mandatory expense. If you want to buy a new car, the cheapest way to buy a car is to pay cash for it. By paying cash you will avoid any finance charges. However, there are not very many people have thirty to fifty thousand dollars to spend on the vehicle. Lease or finance are two main options if you don’t have a lot of cash available to spend on the car. I have chosen the BMW and Infinity dealership to do my analysis. I picked two similar cars form the both dealerships: X5 xDrive35i Sport Activity from BMW and Infiniti FX50 from Infinity dealership. After analyzing financing and leasing options, there is no clear answer on whether to finance or lease a vehicle. It basically all depends on how much money you have, how many miles you drive, how long you want to keep your car for and etc. BMW offers 0.9% APR for 24 month and 3.9% for 25-60 month with $0 down payment to finance the X5 xDrive35i Sport Activity. The price of the vehicle is $57,700. It’s approximately $1,700 per month for 36 months. The lease option is $699 per month for 36 months with $3,000 down payment, $725 acquisition fee, and $4,424 cash is due at signing. The total lease payment is $25,164. At the end of the lease, lessee will be liable for disposition...
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...expenses once the company loses federal subsidies. It is April 30, 1999 and Arlene Friner, CFO of Amtrak, has already arranged the financing of all of the equipment save for six locomotives and seven train sets that will cost $267.9 MM. She has been tasked with determining the additional financing for this equipment, either by using precious federal funding available for capex, borrowing funds and buying the assets, or agreeing to a levered lease agreement with BNY Capital Funding LLC (BNYCF). Discussion Amtrak should discard the alternative of accepting federal funds available for capex. This alternative has been deemed “premium and precious” and should only be used for projects that cannot be cost-effectively financed including safety, right-of-way and infrastructure related projects, and major overhauls. The Acela equipment purchase does not fall in one of these categories and the company should pocket this option and consider its other two financing options: levered lease or borrow and buy. The company should pursue the levered lease agreement with BNYCF for a number of reasons. First of all, it is the lowest cost alternative. The company has never had positive net-income and will not have to pay taxes until it has achieves such. Assuming Amtrak does not have to pay taxes during the financing of this project, the present value $220.26 MM financing...
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...Chapter 18 Lease Financing ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 18-1 An operating lease is one that typically requires the lessor to service the equipment, that has a lease term that is much shorter than the life of the equipment, and that can be cancelled by the lessee. A capital or financial lease has a lease term that is closer to the expected life of the asset, requires the lessee to provide maintenance service, and cannot be cancelled without a substantial penalty. A sale and lease back is generally set up like a financial lease, except the leased property was formerly owned by the lessee, who sells it to the lessor and simultaneously leases it back. These terms are not hard and fast, and actual leases can have some of the characteristics of operating leases and some of financial leases. Before 1973, when FASB 13 was passed, firms could lease on a long-term, non-cancelable basis, and thus create a long-term liability, yet not show either the leased asset or the liability on its balance sheet. After FASB 13, most financial or capital leases had to be shown on the balance sheet, with the leased asset appearing as an asset and the PV of the future lease payments appearing as a liability. This is called “capitalizing the lease,” and its purpose was to cause balance sheets to better reflect companies’ actual financial positions. A lease must be capitalized if any one of the following conditions holds: a. The lease terms effectively transfer...
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...With a continuously compounded annual risk-free rate of 5%, we can calculate the annualized lease rates according to the formula: F0,T = S0 × e( r −δl )×T ⇔ F0,T S0 = e( r −δl )×T ⇔ ⎛F ln ⎜ 0,T ⎝ S0 ⎞ ⎟ = ( r − δ l) × T ⎠ ⇔ δl = r − 1 ⎛ F0,T ⎞ ln ⎜ ⎟ T ⎝ S0 ⎠ Time to expiration Forward price Annualized lease rate 3 months $70.70 0.0101987 6 months $71.41 0.0101147 9 months $72.13 0.0100336 12 months $72.86 0.0099555 The lease rate is less than the risk-free interest rate. The forward curve is upward sloping, thus the prices of exercise 6.1 are an example of contango. Question 6.2 The spot price of oil is $32.00 per barrel. With a continuously compounded annual risk-free rate of 2%, we can again calculate the lease rate according to the formula: δl = r − 1 ⎛ F0,T ⎞ ln ⎜ ⎟ T ⎝ S0 ⎠ 83 ©2013 Pearson Education, Inc. Publishing as Prentice Hall 84 Part Two/Forwards, Futures, and Swaps Time to expiration Forward price Annualized lease rate 3 months $31.37 0.0995355 6 months $30.75 0.0996918 9 months $30.14 0.0998436 12 months $29.54 0.0999906 The lease rate is higher than the risk-free interest rate. The forward curve is downward sloping, thus the prices of exercise 6.2 are an example of backwardation. Question 6.3 The question asks us to find the lease rate such that F0,T = S0. We take our pricing formula, F0,T = S0 × e( r −δl )×T , and immediately...
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...compounded annual risk-free rate of 5%, we can calculate the annualized lease rates according to the formula: F0,T = S0 × e(r−δl )×T ⇔ F0,T S0 = e(r−δl )×T S0 = (r − δl ) × T F0,T 1 ln T S0 ⇔ ln F0,T ⇔ δl = r − Time to expiration Forward price Annualized lease rate 3 months $70.70 0.0101987 6 months $71.41 0.0101147 9 months $72.13 0.0100336 12 months $72.86 0.0099555 The lease rate is less than the risk-free interest rate. The forward curve is upward sloping, thus the prices of exercise 6.1. are an example of contango. Question 6.2. The spot price of oil is $32.00 per barrel. With a continuously compounded annual risk-free rate of 2%, we can again calculate the lease rate according to the formula: δl = r − F0,T 1 ln T S0 Time to expiration Forward price Annualized lease rate 3 months $31.37 0.0995355 6 months $30.75 0.0996918 9 months $30.14 0.0998436 12 months $29.54 0.0999906 80 Chapter 6 Commodity Forwards and Futures The lease rate is higher than the risk-free interest rate. The forward curve is downward sloping, thus the prices of exercise 6.2. are an example of backwardation. Question 6.3. The question asks us to find the lease rate such that F0,T = S0 . We take our pricing formula, F0,T = S0 × e(r−δl )×T , and immediately see that the sought equality is established if e(r−δl )×T = 1, which is guaranteed for any T > 0 if and only if r = δ. If the lease rate were 3.5%, the lease rate would be higher than the risk-free interest rate. Therefore, a graph...
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...Lease versus Purchase FIN/370 March 30, 2015 Russel Riggs Lease versus Purchase Buy or lease equipment? This question is based and depends on the business “status”, which means that depends on the business capital budget, projections in short/long-term and the necessity of the equipment. Leasing business equipment and tools preserves capital and provide flexibility but may cost you more in the long run, (“NOLO”, 2014). On the other hand, buying equipment means ownerships and tax breaks make buying businesses equipment appealing, but high initial cost mean this option is not for everyone, (“NOLO”, 2014). At the moment to grow a business it will need tools in order to function properly and generate good profits, thus the business must analyze the initial investment that is required, the tax rate and the equipment’s time period of use to do not affect the business finance founds. May the business lease if it is necessary to change constantly the equipment or may the business buy the equipment because it will be until it gets old. Further in this essay we will explain different point of view with its respective example to consider whether to buy or lease. Both leasing and purchasing products has its place, but it is important to determine which path to take for each situation. A lease “permits the firm (lessee) to use the asset without acquiring title, which is retained by the owner (the lessor).”(Titman, Keown & Martin, 2014) Then in order to use the asset the lessee...
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...Online Chapter 15 LEASE FINANCING AND BUSINESS VALUATION Learning Objectives After studying this chapter, readers will be able to describe the two primary types of leases, explain how lease financing affects financial statements and taxes, conduct a basic lease analysis from the perspective of the lessee, discuss the factors that create value in lease transactions, explain in general terms how businesses are valued, and conduct a business valuation using discounted cash flow and market multiple approaches. Introduction This chapter covers two unrelated topics: lease financing and business valuation. Leasing is a substitute for debt financing and hence expands the range of financing alternatives available to businesses (and to individuals). However, leasing should be used only when it offers some advantage over conventional financing. We begin this chapter by discussing factors that contribute to the large amount of leasing activity among healthcare businesses and how businesses analyze lease transactions. The valuation of entire businesses, as opposed to capital projects, is a critical step in the merger and acquisition process. In addition, business valuation plays an important role when one owner is bought out by other owners and when businesses are inherited. The second part of this chapter discusses two techniques used to value businesses. Leasing Basics Businesses generally own fixed assets, but it is the use of buildings and equipment that is important, not their...
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... 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...
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