Question

Describe the differences between leasing a piece of equipment and purchasing it outright and financing the purchase with a loan. Then, compare the lease payments to the loan payments. Next, compare the tax benefits. What are the differences at the end of the lease and the loan? Which is better for a corporation, leasing or purchasing equipment outright? Lastly, identify the factors that would impact this decision and explain your reasoning with examples.

Answer 1

The main difference between leasing a piece of equipment and purchasing it outright and financing the purchase with a loan is the that with a lease the ownership of asset never transfers and you have to return the asset to the lessor at the end of the lease whereas in case of financing you make payments untill you pay the car off and you keep the car.

Both situation involves the monthly payment however in lease it is treated as rental whereas in case of loan every payment you make builds equity in the car.Lease payments are cheaper than finance payments as in case of lease it essentially covers the depreciation of the car where as where in case of finance payments you are paying off the both depreciation of the car and buying equity in the car.

You will get the deduction against the entire lease rental paid as tax benefits whereas in case of financing you will get depreciation on the asset and tax deduction on the interset paid on loan.

One of the main difference at the end of the lease and loan is transfer of ownership in case of loan financing in comparison to leasing where assest is returned back to the lesseor.

If corporation have sufficient cash making a outright purchase is a simple way to proceed

Leasing or purchasing decisions for a corporation can depend upon various factors.

i) Period for which asset is required :- If we required asset for short period or for certain period and after that it will become obsolete for the business that leasing is better option in comparison to financing and vice versa.

ii) Cash flow:- If company having cash flows issues then leasing is better option as lease rental is less in comparison to payment of financing installment.

iii) Cost effectiveness :- Cost effectiveness must be calculated before making any decison as various factors affects our decison and least cost option should be preferred.