Lease Vs Buy Essay

1122 words - 5 pages

1) The scenario is that Bonnesanté's first drug needs to get to Food and Drug Administration trials in six months. For this, it needs to urgently acquire a mainframe computer for running advanced analytical software. The decision needs to be made to select the optimal mode of financing the acquisition by evaluating the lease and buy options available. According to the CEO, it is better to lease simply because of obsolescence. The computer equipment outdates itself very quickly and with smaller more affordable machines becoming much more capable over time, it is advisable to select a short-term lease. The COO says that the best thing to do is buy. He says that the main frame is a ...view middle of the document...

He says so because it won't become obsolete, and because the capital lease will be the equivalent capital output as buying it. The Consultant says that the capital lease is the way to go because of the option to buy with a depreciation claim factored in to the purchase price. The data indicates that the way to go is to purchase the spectrometer though. The main reason for this is because there is no real obsolescence. When getting a 40-month loan with a two-month loan down payment, this brings the present value down to the lowest possible out of all the options available.3) The scenario is that Bonnesanté wants to acquire manufacturing capacity. It has identified a plant even though it might require an upgrade. A decision must be made to choose between the option of a capital lease or a purchase. Additionally, there is a cash flow crisis, which needs to be resolved. The CEO suggested not taking a loan to buy the plant as it reduces future leveraging capabilities and that a short-term loan would solve the cash shortfall. The COO believes that the way to go would be to buy the plant, fix it up, and sell it for a profit that would take care of the current lack of funds. Lastly, the Consultant believes that the best thing to do is buy seeing as upgrades need to be done anyway before work can be done. As well, she mentions that by taking on debt, there are tax savings. The data indicates that the way to go is to purchase the plant and then exercising the sale and leaseback option to provide for the working cash to tide over the shortage in cash flow. This option will also provide the least cash outflow overall.4a) The risks and uncertainties that should be considered while making a lease vs. buy decision are many. In this situation you need to ask certain questions like:What is the economic life of the asset being acquired?What is the rate of obsolescence?What will the impact of its acquisition be on the balance sheet and on the cash flows?These risks will impact capital budgeting because if calculated correctly, there may be a great difference in...

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