Analyzing Lease Versus Buy Decisions" Simulation Summary

Essay by vjvj1234University, Bachelor'sA+, July 2005

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Analyzing Lease Versus Buy Decisions" Simulation Summary

A. For a high-technology item, like computer equipment, is the lease option preferable from the very outset? Why or why not?

Yes, because from the start companies are not profitable and do not receive tax breaks. To buy out right can be costly and equipment will need to be upgraded sooner than the old equipment is profitable. Companies will most likely need to upgrade to remain competitive this can be costly for a new company. Also lease down payments are often cheaper than purchase payments. Due to the high rate of obsolescence, high technology assets like computer equipment are frequently leased rather than purchased outright. The lease gives the business the flexibility to acquire the latest technology on a periodic basis. In contrast, a buyer can be locked into a technology by buying it, and must persist with it even after the technology has changed considerably.

B. Do factors like down payment and the security deposit that has to be paid upfront on an asset have a major influence on a lease or loan option? Explain your answer.

Yes, because down payments and security deposits are paid from company cash

and affects cash flow and balance sheets. Loan options often allow an

organization to purchase expensive equipment with-out upfront cost to the

company. Consider buying a car. You often have to make a sizeable down-payment when you purchase a car. (-2) A down payment and a security deposit paid upfront lower the risk for the lender or lessor. This lowers the present value of the loan or lease related cash outflows for the business acquiring the asset. This in turn lowers the installments that have to be paid on a lease or loan. Depending on the magnitude of the upfront payments made, there...