becomes more complicated when companies are considering large acquisitions, such as land, buildings or particularly expensive equipment. Such purchases are likely to have high purchase prices and require more cash than the company is able or willing to devote to the purchase at any one time. At this point, the company might consider financing the purchase. Depending on the financing arrangements, the payments may be spread over several months or even over many years. Until the seller has received all of the money, title is usually retained by the seller. However, the buyer is able to depreciate the equipment even as payments are being made upon it ("Advantages," 2006).
There is another financing alternative, and that is for the buyer to have the right to use the equipment, but not to take title at any point. This is a lease. The company that owns the asset (called the lessor) grants the right to use the equipment to the acquiring company (the lessee), but retains title. At the end of the lease term, the equipment reverts to the lessor unless the lease is extended or the lessee purchases the equipment for an agreed upon price. The key difference in leasing equipment over purchasing equipment is that the title remains with the lessor while the lessee has the right to use and benefit from the equipment ("Leasing," 2005).
There are many different reasons that a company might choose to purchase equipment, including the tax benefits of depreciation and the right to modify or sell the equipment should the need arise. Owning the equipment outright also provides a long-term asset to the organization and may enhance the company's balance sheet as a result. The company has greater control over the asset, and also knows exactly how much the asset will cost. In inflationary times, the company may choose to finance the purchase since the company will be paying a fixed rate as dollars become worth less over time; if interest rates ...