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Leasing versus Buying

You are the controller for the Southwest Corporation. To expand your manufacturing facilities you are interested in acquiring several machine tools. Your company president has asked you give him advantages and disadvantages (comparisons) for buying this equipment or leasing this equipment.

List at least four advantages and disadvantages and provide an explanation of these elements.

Solution Preview

Good reasons for leasing.

1. Taxes may be reduced by leasing. If the corporate income tax were repealed, long-term leasing would become much less important. The tax advantages of leasing exist because firms are in different tax positions. A potential tax shield that cannot be used as efficiently by one firm can be transferred to another by leasing.

2. The lease contract may reduce certain types of uncertainty that might otherwise decrease the value of the firm. The lessee does not own the property when the lease expires. A lease contract is a method of transferring this uncertainty from the lessee to the lessor. If the lessor is a manufacturer, the lessor may be better able to assess and manage the risk associated with the residual value.

3. Transactions costs may be lower for a lease contract than for buying the asset. The costs of changing ownership of an asset many times ...

Solution Summary

This solution is comprised of detailed explanation of the pros and cons of leasing and pros and cons of buying an equipment as well as the reasoning behind each element.