Question

Would it be better to buy or lease and asset for a company?

In each scenerio (lease/ buy) explain how each would affect the finacials.

Answer 1

Both options have pros and cons, and decision to buy or lease an asset should be made after analyzing the specific company's business situation and needs. For example, buying option would be good if a particular asset has a long usable life and company's product line is such that the equipment will be useful in long run. However if a company is in line of business where technology is rapidly changing OR where asset has short useful life, leasing would be better option. Sometimes there is also a buyout option offered at the end of lease.

Financials: Leasing would require less initial cash outlay as compared to buying. If company is not keen on making huge expenditure at once, leasing could be a better option. So company can opt to pay monthly over multi year period rather upfront. When buying, one might also need to get loan approvals if they plan to finance by taking loan. Generally cash flows with leasing would be more predictable.There is also generally tax benefit associated with leasing, where you could deduct lease amount. When buying only interest portion might be deductible. When buying one might be able to realize tax savings by depreciation tax shield. Even though leasing might not have high upfront cost, it may be bit expensive sometimes than buying, moreover you have lack of ownership. When calculating certain financial debt/leverage ratios, effect of leasing should be considered too as a liability. When leasing, a company might also be bound by a contract, so it may be obligated, especially if business is looking to change direction.

Generally a company should conduct lease versus buy analysis as part of it's capital planning and arrive at a decision based on best profitability (example NPV method of lease v/s buying).