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    Lease versus Buy Decisions

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    Your help in answering these questions is greatly appreciated.

    a. 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.

    b. Under what circumstances is a capital lease a better alternative to an operating lease?

    c. Under what circumstances is a capital lease a better alternative than buying an asset?

    d. How do qualitative factors like the condition of an asset impact a final lease or buy decision?

    e. How important are specialized asset leasing businesses to the success of innovative arrangements like a sale and leaseback?

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    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 it will have a major influence on a lease or loan option. The higher the down payment or security deposit will need higher cash outflow right at the time of initial using of asset. It will entail higher initial cash outflow requirement. This will increase the loan duration and thereby the interest. This can also motivate the buyer to shift to alternate financing arrangements like leasing.

    b. Under what circumstances is a capital lease a better alternative to an operating lease?

    Financial Accounting Standards Board has ruled that:
    Lease should be treated as an capital lease if it meets any one of the following four conditions -
    (a) if the lease life exceeds 75% of the life of the asset
    (b) if there is a transfer of ownership to the lessee at the end of the lease term
    (c) if there is an option to purchase the asset at a "bargain price" at the end of the lease term.
    (d) if the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market value of the asset.

    Capital leases are treated as the acquisition of assets and the incurrence of obligations by the lessee.
    Operating leases are treated as current operating expenses.
    There are two ways of accounting for leases. In an operating lease, the lessor (or owner) transfers only the right to use the property to the lessee. At the end of the lease period, the lessee returns the property to the lessor. Since the lessee does not assume the risk of ownership, the lease expense is treated as an operating expense in the income statement and the lease does not affect the balance sheet. In a capital lease, the lessee assumes some of the risks of ownership and enjoys some ...

    Solution Summary

    This explains the Lease versus Buy Decisions, operating lease, capital lease, sale and leaseback and other related concepts

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