Question

In a lease-versus-buy analysis, the correct comparison is the cost of lease financing versus the cost of the alternative financing method to be used if the asset is not leased.

True

False

Answer 1

The answer is True

In a lease-versus-buy analysis we have to choose between two alternatives

1. Take the asset on lease.
2. Borrow funds and buy the asset.

Whichever alternative will have the lower cost that alternative would be selected.

Cost of Leasing can be defined as the Present Value of Post tax Lease rentals.

In the second alternative we would need to borrow funds to finance the purchase of the asset. Borrowing is a method by which we would take a loan to meet our requirements. Here the requirement is to purchase the asset. Borrowing funds and buying the asset would involve payment of loan installments (Principal Amount + Interest amount) to the person who has financed such loan.

Remember we are not using our own funds instead we are borrowing such funds to meet our requirement to purchase the asset.

Therefore Borrowing funds and buying the asset is also a financing method which would be used when we will not choose to Lease the asset.