...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...
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...Lease Versus Purchase Should your company lease or purchase equipment? The answer to this depends on circumstance. Leasing equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life, both areas will be compared for a decision. Purchasing Before making the decision to purchase or lease a business needs to evaluate how the equipment will be used and the useful life of the equipment. Purchasing equipment has both pros and cons depending on the circumstances. Equipment of any kinds has maintenance and repairs over the years. One advantage for this company purchasing the equipment is a lower cost of maintenance. Typically the firm is responsible for all maintenance cost associated with the product, but there is options for extended warranties to cover the cost of repairs that need to be made. (Quickbooks.intuit.com, 2014). The firm is able to enter into a maintenance contract with the manufacture of a flat rate of $5000 a year (Titman, Keown, & Martin, 2014). Because leasing does not include maintenance the cost would grow each year as the equipment ages and becomes more prone to problems. A big disadvantage to purchasing equipment is the interest payments associated with the loan. Over the three years the firm will own the piece of equipment their average interest payment will be...
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...Leasing versus Purchasing Team A FIN 370 October 19, 2015 Ms. Yvonne Downer Leasing versus Purchasing Firms are facing financing decisions on a daily basis such as the length of the obligation they want to incur’. Firms have to decide whether it is short-term of less than a year, long-term for twenty years or more or something in between. Intermediate debt is debt that is between five and ten years in length and is either term loans or a lease on real estate or equipment. A firm will consider many factors in deciding whether to take a loan for the purchase of the asset to be used or to lease the asset. Herbert Mayo lists several variables firms that should be looking at when deciding to buy or to lease “These include the firm’s tax bracket, the terms of the lease, the asset’s anticipated residual value, and the cost of obtaining funds to buy the asset (Pg. 589)”. The firm must also conduct a cost analysis to determine which method will be the most cost effective to the firm by determining the present value of both purchasing and leasing the asset. The firm will purchase the asset if the costs are less than the cost of leasing, and will lease the asset if the costs of leasing are less than the cost of purchasing. The firm must also decide if they what ownership of the asset. (Mayo, H.B., 2012) Leasing or renting, is a contractual obligation between a lessee, the person leasing, and a lessor, which is the owner of the asset being leased. Leasing contracts can...
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...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...
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...Debt Versus Equity Financing ACC/400 May 14, 2012 Debt versus Equity Financing Debt versus equity financing is a critical element in the process of managing a business and also the most challenging decision facing managers who require capital to fund their business operations (Schroeder, Clark, & Cathey, 2005). Debt and equity are the two main sources of capital available to businesses, and each offers both advantages and disadvantages. This paper will compare and contrast lease versus purchase options, examine debt and equity financing, provide examples for each source of financing, and identify which alternative capital structure is more advantageous. Lease vs. Purchase Options: Compare and Contrast In business the decision to lease or purchase is a critical element of strategic management. Equally important is the way in which the asset will be used. Operating leases are most often used by organizations looking for fixed payments with no long-term risk, and a limited useful life of the asset. Capital leases are more aligned with the features of a conventional purchase. Purchasing often requires a higher monetary expenditure at the start, in addition to acquiring the financing to purchase through a lender. Leasing usually requires a lesser amount of cash down, and the monthly payments are often smaller. Additionally, leasing offers tax benefits because the full lease payment can be immediately deducted, whereas purchasing only allows the interest...
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...Lease versus Purchase Ashley Neighbors, Kenterrian Hall, Chelsea Lester, FIN – 370 / Finance for Business September 15, 2014 Timothy Gould Lease versus Purchase Introduction There are many differences between leasing, purchasing, and having a maintenance agreement on equipment. When deciding which route to take one must consider price as well as look at all aspects in the process. Reviewing the additional problem at the end of chapter 27 of Basic Finance, comparing leasing versus purchasing, one can see the break down of each option to better understand which way will save more money as well as be more beneficial. Lease Management has decided to acquire a new asset that costs $200,000. The estimated economic life of the asset is five years, but the firm wants the use of the asset only for three years. If the firm purchases the asset, it anticipates selling it at the end of three years for $50,000. The firm may lease the asset for $55,000 a year paid at the end of each year. The lease does not include maintenance. It is estimated that annual maintenance initially will be $5,000, paid at the end of the year, but that cost will increase by $1,000 each year as the asset ages. Purchase The firm could purchase the asset with a five-year loan of $200,000. The loan will be retired in five payments of $40,000 unless the equipment is sold, in which case the loan must be paid off...
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...Debt versus Equity Financing Brenda L. Rochelle ACC/400 November 7, 2011 Carl Mir Debt versus Equity Financing Introduction In this paper, the author will attempt to compare and contrast lease versus purchase options by providing definitions of debt financing and equity financing and providing examples of each. Additionally, the author will attempt to address which alternative capital structure is more advantageous and why. Business owners must decide whether to purchase outright, finance purchases, or through a long-term lease. Full rights of ownership are realized when purchasing outright. Financed purchases lessen control of the asset by the buyer. Restrictions may be placed on the buyer’s right to sell by the lien holder in an installment purchase. In a long-term lease, the lessee lacks the right to sell, except for any purchase options available. An alternative is short-term leasing. This alternative frees the lessee of most risks of ownership, specifically obsolescence and maintenance. Additionally, the rental rate reflects these advantages. Choosing between outright purchase, financed purchase, long-term lease, and short-term leasing, causes management to face operational considerations such as maintenance, obsolescence, and the degree of control. Decisions involving financial considerations are necessary when ownership is selected. Debt Financing Debt financing is borrowed money a company receives in return for a promise to repay the loan. This...
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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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...basic rights of preferred stockholders, the features of preferred stock, special types of preferred stock and the advantages and d isadva ntages of preferred stock. Review the basic types of leases, leasing a rrangements, the lease contract, the lease-versus-pur chase decision, the effects of leasing on future financing , and the adva ntages and d isadvan tages of leasing. Describe the basic types of converti ble securities, their general fea tures-incl ud ing the conver sion ratio, conversion period, conversion (or stock) value, and effect on earnings-and financ ing with convertibles. • II Demonstrate the procedures for dete rmi ning the stra ig ht bond value, conversion (or stock) va lue, and market value of a convertible bond. Explain the basic characteristics of stock purchase wa rrants, the implied price of an attached warrant, and the va lues of warrants-theoretical, market, and warrant premium. Define options and discuss the basics of ca ll s a nd puts, options markets, options trading, the role of call and put options in fund raising, and using options to hedge foreign currency expo sures. the DISCIPLINES CHA PTER 14 I S I MPOR TA NT TO • u((ounting personnel who will provide important data a nd tax insights to the lease-versus-purchase decision process. • information systems analysts who will design systems that p'ro vide timely information that can be used to monitor and track the market behavior of the firm' s outstanding...
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...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 needed to purchase the equipment at the...
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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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...Spring 2013 The Leasing Environment Most companies and businesses today lease several different types of things especially businesses in the agriculture and construction sectors. A lease is a contractual agreement between two people; a lessor and a lessee. A lessor is one who owns the property, while a lessee is given rights to use their property for a time period. Lessors come in different types of categories such as banks, captive leasing companies and independents. The largest of the lessors are banks. They have low-cost funds and are more aggressive in the market. This allows them the advantage of being able to purchase cheaper assets than their competitors. Captive Leasing Companies are firms whose purpose is to perform leasing operations for a different parent company. They have an advantage over banks. This advantage is that they have a point of sale in finding leasing patrons allowing them to quickly form a lease arrangement. Their main focus is on their company’s products. The last type of lessor is independents. They do not have advantages like banks and captive leasing companies. Over the past years their market shares have dropped because of banks being more aggressive. They do not have the advantages like the other two lessor categories. They’re good at developing innovative contracts for leases. They work with companies that do not have captive finance companies to handle their leases for them. They only have about 23 percent of the new business on the market...
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...reduce cost by $900,000 in one year. The author of this paper would recommend a few possible way of making this happen. The first step taken was to reduce agency staff personnel. Staffing agencies were created to provide health-care providers with talented health-care professionals to fill their demanding and challenging openings ("White Coat Medical Staffing", 2013). The main reason this was chosen was due to salary. Agency worker’s salaries are often twice that of a regular staff member. This move alone saved ECH over 2.4 million dollars in salaries and benefit for the agency workers. The second cost cutting step was to changing the skill mix; this was achieved by hiring nursing assistants at an average salary of $26,609 a year versus a registered nurse who makes $69,123 ("Salary.com", 2013). This resulted in an overall saving of 1.4 million dollars. So just by adjusting the staff ECH was able to save roughly 3.8 million dollars. In order to fund the changes it was decided that a loan needed to be secured. Loan options were presented and the decision was made to pick loan option number one. This loan was chosen because it has a payback 12 months. This option offered a higher interest rate but with the 12 month pay back it was actually lower in interest paid. So over all the decision to reduce the use of a staffing agency, changing ECH’s skill mix and hire more nursing assistance at a reduced rate compared to registered nurses paid back to EHC...
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...can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen. (e) Suppose a firm is considering refunding and interest rates rise during a time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm, and thus increase the expected interest savings. (Points : 20) | Question 2.2. (TCO D) Tuttle Buildings Inc. has decided to go public by selling $5,000,000 of new common stock. Its investment bankers agreed to take a smaller fee now (6% of gross proceeds versus their normal 10%) in exchange for a 1-year option to purchase an additional 200,000 shares at $5.00 per share. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly 1 year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share 1 year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker's required return on such arrangements is 15% and ignore taxes....
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