Analyzing Lease vs. Buy Decisions

Essay by jdean32University, Bachelor'sA+, September 2007

download word file, 3 pages 4.0 2 reviews

Downloaded 161 times

Asset acquisition is important for every business. One can either buy the asset or lease it. Comparing the present value of the outflows involved with the lease and buy options is a good way to decide but other factors are involved too. I completed the Financial Analysis for Managers simulation which required me to act as the CFO for the Bonnesante Research firm. As the CFO I was put in position to make crucial decisions regarding the options of leasing versus buying for certain situations. This required me to consider things such as the nature of the asset, its rate of obsolescence, and the company's cash flow situation before making the decision to buy or lease. Following are the situations and the decisions that I made as well as explanations as to why I made the decisions I did.

For the first part of the simulation my goal was to evaluate the different lease and loan options for the acquisition of a mainframe computer and select the option with the lowest amount of cash outflow.

The mainframe computer was available for an outright purchase as well as an operating lease. After evaluating the options in depth I made the decision to lease the mainframe for 24 months with a down payment of 1.5 months lease amount. The main reason I made this choice was because it presented the lowest cash outflow which would allow the corporation to conserve cash. I also considered the fact that the computer was moving rapidly towards being obsolete and this made the option of buying very unattractive. Since there was no tax advantage to taking out a loan to buy, there really was no incentive to buy the computer instead of leasing it.

I also chose to lease the mainframe computer instead of buy because...