Leasingversus buying questions and answers
Suggestone (1) key economic factor that motivates leasing as an option inacquiring an asset. Explain the potential asymmetries that may existwhere leasing may be beneficial to both the lessors and the lessee.
Inan economy where interest rates keep on fluctuating due tounfavorable balance of payment, it would be advisable to lease anasset rather than acquire it. Take a scenario where the asset thatthe company intends to purchase is quite expensive. The company wouldbe forced to seek alternative methods to fund the asset acquisitionsay via the use of a bank loan. If the banks interest rates keep onfluctuating, the company might discover that they actually paid moreinterest than they would have paid initially.
Whereleasing is may be both beneficial to the lessor and lessee, severalasymmetries may exist
Thelessee only has the ‘right’ to use the asset: The leasing companyonly holds the privilege of using the asset for its operations.However, the lessor can take back its asset at the expiry of thelease agreement.
Thelessor might put some restrictions on the use of the acquired asset:For example the lessee might be restricted to not to make any changesor improvement to the leased asset without the approval of thelessor.
Thelessee must pay lease rentals for the acquired asset on a regularbasis: If the lessee fails to fulfil his end of the bargain as agreedupon in the lease agreement, the lessor might terminate the contractat any time.
Determineone (1) significant benefit to an organization that decides to leasean asset that conventional lease analysis evaluation reveals has anegative Net Advantage to Leasing (NAL). Provide a real-life scenariothat supports your answer.
Netadvantage to leasing (NAL) is a financial analysis tool that is usedto quantify whether it is beneficial for a company to lease an assetor borrow funds to acquire the said asset (Miller & Upton, 2014). A negative Net advantage to leasing indicates that its advisable tobuy while a positive Net advantage to leasing indicates that it isadvisable to lease the asset.
Oneof the most significant benefits to an organization that decides tolease an asset that has a negativeNet Advantage to Leasing (NAL) is saving on taxes. A wise CFO willthink of how to save up more of the company’s revenues as the costof taxes would be transferred to the lessor.
WhenEast African Airlines collapsed, Kenya decided to have its ownnational carrier by the name Kenya Airways (kq). The calculation ofNAL showed a negative value, indicating that it would be morebeneficial to buy than to lease. However, the taxes associated withbuying the planes were so high and the CFO advised the board that itwould be more beneficial to lease the planes and pass the taxes tothe owners of the fleet.
Miller,M. H., & Upton, C. W. (2014). LEASING, BUYING, HND THE COST OFCAPITAL SERVICES. FinancialDecision Making Under Uncertainty,95.