Question

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There are several advantages of leasing rather than purchasing property. Depending on the amount of cash on hand it may be beneficial to make equal monthly lease payments, rather than a large upfront purchase payment. Also, if you have a shorter term lease you do not have to worry about being stuck with obsolete property/equipment. You do not have to worry about the costs of trying to find someone to buy your old property. At the end of the lease simply lease an updated version of what you need. Leases also provide tax benefits because the entire payments are expensed, reducing taxable income.

A disadvantage is that you are making payments for something that you do not own at the end of the agreement. Also, if you were planning on renewing the lease of a building, the owner may choose not to continue to lease the property. Which can be very difficult if your business is well established in that area.

Answer 1

Yes the advantages and disadvantages listed in the post make sense. Let us first examine what has been stated in the post.

On advantages : yes it is possible to get the asset for use even when upfront capital is not available , if a business uses lease option. However in practical scenario , if capital is available from different sources say long term loan , it may be wothwhile to evaluate thoroughly the option of leasing versus taking a loan and buying an asset. Being able to procure loan at reasoanble cost may enable an enterprise to solve problem of having lower upfront funds.

Other advantage listed is ease of replacing the asset on expiry of lease period. It also make sense but in practical scenrio , the situation may be different. If the asset is such as it is difficult to sell , it means that market for asset is not developed. In such case even the lease of such assets could be costlier or rarely available.

On the advantage of tax benefits, at one hand where leasing gets you reduction in income for lease payments , owning an assets can get you depreciation benefits. If you have obtained loan to acquire an asset , you may get tax benefit on interest payments also.

On disadvantages side : These again depends upon the circumstances at the time of making decision. If the lease decision is found to be in favour of enterprise and only disadvantges is that owner may not extend the lease, the lessee can negotiate lease for a longer period.

Conclusion : Lease or own decsion may have its own merits or demerits. However whether an enterprise goes for lease or it goes for owning an asset depends upon the net benefits. Various capital budgeting techniques help to calculate the net benefits. For example if NPV of a lease transaction is favourbale to own transaction , lease will be preferred option. Hence in practical scenario all the advantages and disadvantages need to be quantified and discounted to present value to make an objective decision.