The rate of technology change is increasing, with an emphasis on client/server
technology, faster system development, and shorter life cycles. This has led to spiraling information technology (IT) budgets, driving the need for a re-evaluation of IT management issues. Organizations must find new ways to accommodate technological change. Leasing has recently emerged as a feasible, cost-effective alternative to purchasing equipment, particularly in the desktop and laptop areas.
Kansas Guidelines for Lease vs. Purchase of Information Technology
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To evaluate whether or not you're getting a good deal, focus on the four factors that determine how much money you will end up spending, says Reed. Those factors are the monthly payments, the length of the lease, the down payment, and the mileage restrictions on the lease contract.
The lease duration and monthly payments, must be well calculated in advance. Buying entails larger monthly payments, but, the person owns an asset. Whereas, a lease, provides cheaper monthly payments and allows one to procure an asset they would not otherwise be able to afford.
4 Factors to Evaluating a Lease OptionA lease option comes at the end of a lease contract. You may be able to extend the lease, stop the lease, or even purchase the home you are renting.Maintenance Record.Cost to Lease vs. Cost to Buy.Cost to Extend Lease vs. Cost of New Lease.Market Considerations.
Lessee's Point of View: (Lease or Buy/Lease or Borrow Decisions): Once a firm has evaluated the economic viability of an asset as an investment and accepted/selected the proposal, it has to consider alternate methods of financing the investment.
Factors Favoring Leasing:Cash flow: A business can conserve its cash flow by leasing.Credit rating: The company has not established a credit rating sufficient to support a mortgage.Maintenance: The landlord is responsible for maintaining the property.More items...
(i) Determine the present value of after-tax cash outflows under the leasing option. (ii) Determine the present value of after-tax cash outflows under the buying or borrowing option. (iii) Compare the present value of cash outflows from leasing option with that of buying/borrowing option.
Factors to consider when making the lease or buy decisionYou want control of the property.You can consider the long-term cost.For some businesses, such as certain retail and service businesses, location is all important.You haven't found a suitable property to lease.You are in an area of appreciating land values.More items...
The leasing process starts when the lessee enters into a leasing contract with the lessor. Lessee approaches the Manufacturers and Suppliers, gathers all details about the required asset (design, specifications, price, installation, warranty, servicing etc.)
If the monthly payment for leasing is less than the monthly payment for buying, this also includes any lost interest due to the higher monthly payments. If leasing is more expensive than buying, your interest costs for buying are reduced by the amount of interest you would earn on the difference.
Evaluation of Lease Decision: 3 Methods (with formula)Present Value Method: Under this method the present value of lease rentals are compared with the present value of the cost of an asset acquired on outright purchase by availing a loan.Cost of Capital Method: ADVERTISEMENTS:Bower-Herringer-Williamson Method: