Share
Explore BrainMass

Capital Lease vs Operating Leases

1. What do I mean when I say to match the type of financing with the useful life of the asset?
2. What is the difference in a Capital Lease and an Operating Lease? When is one more useful over another?

For the second example, do you want just definition or want us to provide examples? Thank you.
Examples would be wonderful. Thank you!

Solution Preview

1. What do I mean when I say to match the type of financing with the useful life of the asset?
This is known as matching the maturity that is the life of the asset is matched with the duration of financing. Maturity Matching concept is approach where the firm matches the expected life of the asset with the expected life of the source of funds raised to finance assets. Thus a ten year loan may be raised to finance a plant with an expected life of ten years. Inventory to be sold in sixty days may be financed by Overdraft.

The advantage of matching the maturities is that it increases the profitability, on the other hand it can reduce the liquidity and increase the risk.

2. What is the difference in a Capital Lease and an Operating Lease? When is one more useful over another?
A lease is an agreement conveying the right to use property, plant, or equipment usually for a stated period of time. The owner of ...

Solution Summary

1. What do I mean when I say to match the type of financing with the useful life of the asset?

$2.19