Analyzing Lease vs Buying Decisions

Bonnesante is an up and coming pharmaceutical company that is striving to gain a place in the pharmaceutical market. In this paper, we will discuss and analyze the lease versus buying decisions that the Bonnesante Company must face on their journey to success or failure. Three scenarios will be analyzed including our recommended solutions, and why we made those recommendations. We will also summarize the different capital budgeting concepts addressed in the simulation by answering the following questions; what risks and uncertainties should be considered while making a lease vs. buy decision, how do those risk and uncertainties impact capital budgets, what is the advantage of computing the present value of outflow in making lease vs. buy decisions, in what circumstances is a capital lease a better alternative to an operating lease, under what circumstances is a capital lease a better alternative than buying an asset, and how do qualitative factors like the condition of an asset impact a final lease or buy decision?In scenario one, Bonnesante needs to consider purchasing or leasing a mainframe computer.

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English: Metropolitan Life Bldg., Manhattan, New Y...

English: Illustration of new lease accounting

After careful consideration of the recommendations from the CEO, COO, and Consultant, we decided to lease a mainframe computer for 30 months for three reasons. One, because at this time Bonnesante is not profitable, and therefore is not taxed. Two, an operating lease will not reflect on the company's balance sheet, whereas a loan would. Three, the short term lease was also chosen because of the rapid obsolescence of the computer equipment.

In scenario two, Bonnesante needs to acquire an advanced digital spectrometer for research and development. The spectrometer will cost $2,000,000 which prompts the question should Bonnesante lease or purchase the spectrometer? We chose to buy the spectrometer because the benefits outweighed leasing the spectrometer. The spectrometer can be used for its entire...