In: Finance
What are the considerations for conducting a cost/benefit analysis in an equipment leasing versus owning decision?
In every capital budgeting decision of a company, there are always two major alternatives available, to take the asset on long term lease ot to purchase the asset.
This decision is majorly based on the Cost Benefit analysis conducted by the company under both the alternatives in order to identify the best option for the organization so that I can achiveve highest NPV or maximum cash inflows and minimal cash outflows.
The major considerations for conducting a cost benefit analysis is as follows:
1. Cost of the asset/puchase price: Generally these equipments are highly priced and the first consideration is if it has the required amount of money or will have to borrow it from the market. What will be the interest rate of loan in case it has to borrow
2. Depreciation/Tax Savings: Owner is eligible for charging depreciation on the asset purchased while the lessee is not. Depreciation is allowed as a deduction from income taxes which leads to the tax savings for the company
3.Salvage Value: Owner is entitled to receive salvage value on sale of asset while the lessee is not.