Lease VS Buy Decision

Lease VS Buy Decision

Introduction

This is the most common question asked everywhere, whether one should lease or go for a purchase. The answer to it is based in the thoughtful assessment of the various objective questions and the through assessment of the cash flows after tax and the various alternatives attached to each of them (Bowles 1976). In addition to the assessment of the above factors, there are various other things like owners objective, the cash needs to sustain and the location purpose. When a lease or buy decision is to be made the advantage of both of them should be assessed.

Discussion

Leasing

When the physical control of the land is assumed without the ownership of the land than it is called lease (Lebo and Scott 2009). The advantages and disadvantages related to lease are as following

Advantages

The major advantage of lease is that one can acquire land in a prime location, which the user could not have afforded. The other advantage is the added benefit of mobility; one can relocate at any time without any problem. Since leasing requires very low cash flow, thus large amount of money is saved for business (Kimmel, Weygandt and Kieso 2011). Leasing in the modern day is also considered a cheap source of financing. Since this leasing stops businessman from indulging into other expensive financing for purchasing of land or heavy machineries. The added benefit of leasing is that, the cost attributed to leasing is fully deductible from income, thus saving millions of dollars in the form of tax savings (Peterson and Eschenbach 2009) (Souza 1986). Leasing gives person a focus, he can give more attention to the business.

Disadvantage

The firms who have strong earnings record over the time could have taken added tax saving in the form of ownership, thus leasing proves to be an expensive option in this scenario. The property is always on rise, so no benefit will be given to the tenant (Kimmel, Weygandt and Kieso 2011). The leaser would have to pay rent for the lease product no matter the company is profiting or going in loss. Any addition or modification to the leased item wont considered to be the part of tenant but it will become the part of owners assets (Bowles 1976).

Owning

Owning is the name for getting full control of the asset. It gives full control to the owner in the form of cash flow from operations, Capital appreciation or other economic benefits. The advantages and disadvantages are as follow.

Advantage

The owner can have the advantage of capital appreciation on the asset. The person through owning of property can go for equity build up and debt reduction through amortization. The person owning the asset has the legal control over the asset (Peterson and Eschenbach 2009) (Souza 1986). The owned property can be rented out and it can become a vital source of cash flow. The other benefit related to it can be the depreciating of asset over time and getting tax savings through ...