...Lease Versus Purchase Rose Kincaid, L’Tanya Watts & Ami Norfeldt FIN/370 April 20, 2015 Michael Rodriguez When a company is making a determination if it should lease or purchase equipment there are factors used to weight the best advantage for the company financial health. One of the variables affecting the decision is the tax bracket in which they are classified and the cost of buying the asset. If the lease is classified as an operating lease the company has benefits of using assets without any risk from maintenance and receives the write-off for the business expense. The value and depreciation are the responsibility of the lessor the companies only are to maintain the cost on the balance sheet when certain conditions are met. In this scenario, management needs to make a decision whether or not to buy or lease an asset valued at $200,000. Calculating the present value of the cash outflows and inflows of the asset is imperative to the analysis of the investment. The cash inflows and outflows generated from leasing affects the bottom line differently than purchasing. It is important to determine the asset’s residual value to achieve maximum advantages of either option. Various factors including the company’s tax bracket and cost of the fund directly affected the firm’s decision to lease the asset versus buying it. The present value of the buying cash outflows by far exceeded the leasing cash outflow. Considering the pros of cons of leasing versus buying is an...
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...Lease versus Purchase Paper FIN/370 Lease versus Purchase Paper There are many factors to when one is considering buying or leasing equipment, building or automobile. And the most important primary factor is, should one lease or buy? Lease means to rent the equipment, building or automobile with the option to own the property. While purchasing is to own the equipment, automobile or building. One has to consider how long one is keeping the asset of property, and which option fits one’s needs. There are advantages and disadvantages with both options, and it depends on one’s business or life situation and making the right choice to buy or lease in that given situation. Factors Involved According to BizFilings (2012), when an organization is deciding to lease or purchase assets then there are factors to consider. One way to compare the two would be to do a cash-flow analysis. When doing the analysis one should take into consideration the following factors: 1. Terms of the lease 2. The cost of capital 3. Federal income tax rate 4. State income tax rate 5. Purchasing and financing terms 6. The value of the asset as well as the span it is useful 7. Any other expenditures associated with the lease or purchase During the decision making process, it is also important to consider cash flows and the net advantage of leasing or “NAV”. NAV is defined as, “The money that would be saved by leasing an asset instead of buying it, not taking into...
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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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...Caledonia Products Integrative Problem Learning Team “C” Justin Griffin, Charles Ammah, Constance Allen, Edward Mason, and Mark Dawson FIN/370 April 25, 2013 Professor Bruce Huang Caledonia Products Integrative Problem Learning team C is tasked to prepare a response to the Caledonia Mini-Case located in chapter 12 of his and her readings. The team is to formulate answers to questions one through seven and describe factors Caledonia must consider if it were to lease versus buying. Here is the team’s response to the mini case. 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? Caledonia should focus on the project free cash flows instead the accounting profits received from the project because of the free or tax free money the company will receive by analyzing whether to handle the project. The incremental cash flow is the cash flow that Caledonia has interest in which projects marginal benefits that increase value within the company. 2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings? The incremental cash flows for the project in years one through five changes in net working capital is: The Net Operating Cash Flow - revenue net of expenses and liabilities for the specific period ▪ Net Initial Investment...
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...Lease versus Purchase Andrew Senkus, Brent Farmer, Clinton Eubanks, Cynthia Albert, Evan McMurray, & Shante Howard Finance for Business / FIN370 December 8, 2014 Su-Yi Lien Lease versus Purchase When it comes time for a company to make a larger investment, they are faced with the question of purchasing versus leasing. In making this decision a few things must be kept in mind. Leasing assets require a much smaller cash outlay than purchasing the assets. Many times when leasing, a maintenance contract will be included to help with the cost of maintenance. When certain assets are leased, it is possible to deduct the interest of the lease from the company’s tax return. On the other hand buying assets allows the company to take advantage of certain tax depreciation benefits. Once the assets are purchased and paid in full, the company will own these assets free and clear. Therefore, if and when the company decides to sell the assets all of the funds received in the selling of the assets will be profit for the company. A problem from our text will be used to illustrate how a firm might solve this dilemma. The Problem The problem in the text explains that management is looking to acquire assets that have a total cost of $200,000.00. The firm only needs the assets for a total of three years while the assets have an economic life of five years. The firm plans to sell the asset for $50,000.00 at the end of the three years of use. The firm must choose...
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...Lease versus Purchase A company looking at new equipment has options; leasing or purchasing. There are many equations a company can use to help determine which is best fit for its business. Exploring all options is the best place to begin when looking at an acquisition. Purchasing A company decides it will purchase new equipment must look at different variables making this decision. The company will look at things like its tax bracket and how much it will cost to make a purchase. The company will also look at the value of the equipment once the term of the loan is completed. The salvage return if the company decides it would like to sell the equipment after its use. At this time, when a business makes a purchase, they will list it on a balance sheet; unlike a lease, which does not at this time (Mayo, 2012). If a company, purchases an asset there are tax implications if the asset is sold at more than book value. Leasing A company decides to lease equipment; it will look at many of the same things when determining if the lease is the best option. Leasing allows the company to avoid things like maintenance if the contract so states. There is also the risk of early termination fees if the business no longer has a need for the equipment before the contract has expired. A company can benefit from potential tax advantage based on lease or rental expense, which is tax deductible. The Financial Accounting Standards Board has set four conditions and if met when leasing, a company...
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...Amt Task1 Service Line Development Running head: SERVICE LINE DEVELOPMENT Business Summary for Trinity Community Hospital Orthopedic Service Line Development Background Information Trinity Community Hospital, a 150-bed hospital with 20 operating rooms and an emergency department on a 25-acre campus, is a community-owned hospital located in a growing community in the southeastern U.S. with a population of 400,000 people in the city and 900,000 in the county. The community is made up of high tech business and industry as well as retirees. It is home to several colleges and a university. The hospital is 25 years old and the campus is comprised of the main hospital with four medical office buildings (MOBs). There are two primary competitors within a 10-mile radius of Trinity which are both private, not-for-profit medical centers. Also, there is a nationally recognized medical center approximately 60 miles from Trinity however this facility is not considered a competitive threat. Numerous specialties with a broad range of medical/surgical services are represented on the hospital staff and all physicians are board certificated. Trinity Community Hospital also boosts of its full Joint Commission accreditation, newly remodeled, modern patient rooms, award-winning dietary department, expert nursing staff, and the highest patient satisfaction scores in the region. Trinity Community Hospital is governed by a six-member Board of Trustees. The board members come from diverse backgrounds but...
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...ensure a smooth expansion, and most importantly, a decision between building, buying, or leasing must be made. A. Advantages and Disadvantages of Hospital Expansion Project 1. Advantages a. Building space for the new orthopedic service line * Having the new orthopedic service line built will allow the hospital to customize their space; location of imaging machines, therapy, diagnostics, inpatient, and outpatient. * Cost is lower than purchasing an expansion property adjacent to campus: $600k versus $700k. * The hospital will own this property and benefit from any appreciation in value of the property. b. Buying space for the new orthopedic service line * The hospital will not have to wait for construction to be completed. * The hospital will own the property and will gain appreciation (equity) value for the building in the long-run. * Interest can be written off on taxes. * With historic low interest rates, purchasing will allow the hospital to own the property while paying a low interest rate on their loan. c. Leasing space for the new orthopedic service line * Low starting cost. “Leasing generally requires less cash down, and the monthly payments are often smaller” (Newman, 2006.). * “There's usually a tax benefit associated with leasing where you get to deduct the full lease payment immediately” (Newman, 2006). ...
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...Leasing vs. Buying a 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...
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...Running head: SERVICE LINE DEVELOPMENT Business Summary for Trinity Community Hospital Orthopedic Service Line Development Background Information Trinity Community Hospital, a 150-bed hospital with 20 operating rooms and an emergency department on a 25-acre campus, is a community-owned hospital located in a growing community in the southeastern U.S. with a population of 400,000 people in the city and 900,000 in the county. The community is made up of high tech business and industry as well as retirees. It is home to several colleges and a university. The hospital is 25 years old and the campus is comprised of the main hospital with four medical office buildings (MOBs). There are two primary competitors within a 10-mile radius of Trinity which are both private, not-for-profit medical centers. Also, there is a nationally recognized medical center approximately 60 miles from Trinity however this facility is not considered a competitive threat. Numerous specialties with a broad range of medical/surgical services are represented on the hospital staff and all physicians are board certificated. Trinity Community Hospital also boosts of its full Joint Commission accreditation, newly remodeled, modern patient rooms, award-winning dietary department, expert nursing staff, and the highest patient satisfaction scores in the region. Trinity Community Hospital is governed by a six-member Board of Trustees. The board members come from diverse backgrounds but each has a vested interest in the...
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...expansion must offer physical therapy center. Due to the amount of space the facility has this is a project that will require more option for a new look in order to continue with the projected look of the new facility. Trinity hospital must open up the options to thinking of the advantages and disadvantages of buying, building or leasing a property around the current area or to the current facility. Every option comes with their advantages and disadvantages when dealing with the financials, possible upcoming development, desired space, and compatible with current standing orthopedic services centers. The option of building the Physical Therapy center should be examined first. Recently the CFO of Trinity Hospital sent an email stating that the construction cost would be $120 per square foot for the 5,000 square feet needed for the center. In total this amount is estimated to the cost of 600,000 in order to build on the property. This option has the advantage to be the sole owner of the property giving them all the rights to daily operations without anyone overseeing them and making sudden changes. The hospital would be totally responsible for everything versus leasing the property. One of the key disadvantages and risks is that the CFO explains that the facility has run out of space to extend on the site of the facility. This option may not be the best option but the risk and benefits must be considered in order to determine the best option to recommend. The next option...
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...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. (Genesove, 2007) (Ghanbari Parsa, 2009) Real Estate Depreciation While real estate is generally concidered a sound investment, the recent crash of the real estate market coupled with the added risks of commercial real estate add more variables to consider when evaluating a lease versus buy situation. If the company has had sufficient success to assume...
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...supervision. Caledonia Products Company is introducing a new product, we have been given the assignment that involves both the calculation of the cash flows associated with a new investment and the evaluation of several mutually exclusive projects. The company is currently in the 34% tax bracket with a 15% discount rate because this project is considered a fad project it will only last five years then it will be terminated. This paper will focus on free cash flows, projection of cash flows during years 1-5, projects initial outlay, cash flow diagram, net present value, internal rate of return, and if the project should be accepted. Free Cash Flow Versus Profits Earned After reviewing the numbers for project Caledonia Products, it shows that the best route that Caledonia Products Company should focus on is free cash flows versus to the accounting profits that was obtained by the project itself. The numbers show that the accounting profits should be earned by this current project due to there is a positive rather than negative cash flow to the company shareholders. In this case, Caledonia’s free cash flow is its total cash available to the creditors who invested their cash to run the project. Accounting profits are costs which are the interest, taxes and the depreciation that run a business and in which it should not interfere the free cash flows. The free cash flow that this project shows, starting from zero to the five year mark will benefit the Caledonia Products company...
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...Hello, A car purchase of lease is one that will be a depreciating cost no matter the choice. Buying a car is great but lets take a good look at the misconception and mistakes of buying versus leasing. When you buy a car one usually finances the contract for the car for at least sixty months. Yes I am buying the car but I must maintain the car with general maintenance ( which is not always included in the initial price of the car ). Then it usually takes at least forty eight months to gain equity for the depreciating asset. This is a rule of thumb used by the car dealers and the lenders. This is why using zero down payments always puts the buyer in a negative equity situation for the duration of a long period of time. One would ask what is the big deal? The big deal is that you are stuck with the car in the negative equity situation and can not trade or attempt to trade because of the negative equity situation. You can trade but once again the wallet will suffer as one will need a substantial down payment. There is also variables to consider of the depreciation of the car as the miles put on it and the overall shape of the car when trading. Leasing is a viable option for few as the credit rating for the consumer to lease must be outstanding and usually have a score of 750 as a rule. The irony of the market is that only eight percent according to the National Automobile Association qualify. You do not take the risk of depreciation and the bank is the owner and takes all the...
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...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 ownership. One way to obtain the use of assets is to raise debt or equity capital and then use this capital to buy them. An alternative way to obtain the use of assets is by leasing. Before the 1950s, leasing was generally associated with real estate (land and buildings), but today it is possible to lease almost any kind of asset. Although leasing is used extensively across all industries, it...
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