Fixed Assets

Araditionally, firms have owned fixed assets and reported them on their balance sheets as assets. However, there may be certain benefits associated with leasing an asset rather than to buying it. The question of whether to lease or buy is rarely a simple decision, although there are formulas and techniques that are used that offer simplified answers to this complex decision. The person performing the lease or buy analysis must do so details about the transaction in hand as well as certain facts about the company considering the asset acquisition including its operational, tactical and strategic goals.

Companies usually analyze the costs of the lease versus buy decision using discounted cash flow analysis. This analysis compares the cost of each alternative by considering the timing of the payments, tax benefits, rate of interest on a loan if the asset purchased is being financed through borrowing, the lease term, lease payments, its salvage or residual value, expected rate of use of the asset, the options for depreciating the asset if it is purchased, as well as the expected speed of obsolescence and the economic life of the asset.

Using the discounted cash flow analysis method, one of the first steps is to determine the net cash outlay in each year of the lease term. Each year's net cash outlay under the lease must be discounted to take into account the time value of money. This discounting allows the calculation of the present value of each of the future series of

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it should buy it rather than lease the asset if the annual cost of ownership and operation is less than the best lease rate the company can find. In other words, the company should buy the asset if it can 'rent' the asset to itself for less than what it would pay to rent or lease it from a lessor. Unfortunately, such a simplified decision-making model probably does not take into consideration the business needs and unique circumstances that a company is experiencing at any given time. The first lesson associated with leasing is that it is essential to understand the terms of the lease, and specifically the obligations of the lessee. For example, some companies offer leases that include routine maintenance, insurance, and taxes as part of the lease payment. However, a more traditional lease requires the lessee to pay these costs during the term of the lease. A lease may also provide a purchase option at the end of the lease term, but not all leases offer this option. The lease or buy decision is complex because each lease contains its own specific combination of terms and condition, and every potential lessee has a unique set of opportunities, challenges, weaknesses and strengths according to (Deroche Cavagnaro, 2004). The se

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