Lease vs Buy Research Paper Example | Topics and Well Written Essays - 2500 words

Lease vs Buy - Research Paper Example The acquisition or lease of the transportation equipment is critical to the nature of the company’s business of bringing its guests to different locations to areas which would further enhance the company’ s delivery of value to its customers. What should the company do? ABC Company plans to acquire transportation equipment or two buses with a five year life and a total cost of $40 million which will transport clients to different areas as a way of adding value to its services. A bank is ready and will to provide a loan for the acquisition. The company can borrow the required $40 million, using a 10 percent loan to be amortized over five years. Therefore the loan will call for payments of $10.4 million per year as can be estimated using a financial calculator. As an alternative, ABC can lease the equipment for five years at a rental charge of $11.2 million per year, payable also at the end of the year. If it is lease, the equipment will not be owned and the risk of loss will belong still to the XYZ Company as lessor. However, ABC Company will be liable pay to annual rental for five years from which tax benefits can also be derived. If it decides to buy the equipment, ABC will be able to save on tax on depreciation for the equipment and maintenance c ost. Since the lessor will own the two buses at the expiration of the lease, the company is somewhat confused on which is the better option. Relying on the comparative figures of $10.4 million payable yearly to the bank to finance acquisition and the rental payments of $11.2 million for yearly payments looks somewhat incomplete to ABC Company without including other factors which can be further quantified. The lease payment schedule is established by XYZ Company the potential lessor with the $11.2 million for five years was given to ABC Company and the latter is at present stage of