Question

"Plant Assets"

Please respond to the following:

Imagine that you are the Chief Financial Officer (CFO) of a startup airline company. The executive management team has tasked you with making a recommendation about whether the company should buy or lease airplanes. Analyze the major pros and cons for leasing and buying assets. Based on your analysis, provide a recommendation to the executive team.

Compare and contrast the three (3) methods for depreciating plant assets. Recommend the method that maximizes profits for both a shorter period of time and a longer period of time.

Answer 1

Major pros and cons for leasing and buying assets are listed below:

Reduced Risk of Obsolescence:Lease terms allow exchanging outdated equipment.

Little or no down payment:Lease terms don’t require down payment like purchasing an asset.

Shared Tax Advantage:Lessor passes the tax advantage of owning the asset to the leasing party in form of lowerpayments.

Assets and liabilities not reported:Companies prefer to keep assets and liabilities off their books.

The beginning stages of all businesses are critical, especially with 80% of businesses failing within the first 18 months according to Bloomberg. As the Chief Financial Officer, I will analyze the pros and cons of leasing and buying assets to determine the best choice for the airline company.

There are both pros and cons for a company when they are trying to decide whether to buy or lease assets. Certain industries tend to lean one way or another when it comes to buying or leasing assets.

Buying Assets (pros)

You own your asset outright

Can use the asset for as long as it will last

Can depreciate the cost on your taxes

More control of how you manage the asset

Buying Assets (cons)

Must pay full price for the asset

If you finance the start-up cost will be more than if you were leasing

Increases the complexity of a tax return

Responsible for updating and disposing of old equipment

Will spend more time managing the equipment

Leasing Assets (pros)

Reduced risk of obsolescence ( can exchange the asset for a more modern one if it becomes outdated)

Little or no down payment required

Shared tax advantages

Assets and liabilities aren’t reported (leased assets can be accounted as a rental)

Lease payments can often be deducted as an expense

Easy to update and dispose of old equipment at end of lease term

Leasing Assets (cons)

Loss of control and property management issues

Contractual obligations that must be paid according to the lease agreement even

From my opionion: I would recommend the company to choose a leasing option. It seems to be more suitable, because the company is new and just starting out. This will be less expensive forthe new company starting out.

The three methods for depreciating plant assets are:

1.Straight line:

Companies expense an equal amount of deprecation each year of the asset’s useful life.

2.Declining balance:

Computes depreciation expense using a constant rate applied to a declining book value.

3.Units of activity:

Useful life is expressed in terms of the total units of production or the use expected from the asset.

For maximizing profits for both a shorter period of time and a longer period of time straight line method would be best. This is because it depreciated the value of an asset on consistent basis over the useful life of the product.