21-1 Leasing

21-1 Leasing - To Buy or not to Buy? Once a Last Resort,...

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To Buy or not to Buy? Once a Last Resort, Leasing now is often the Best Method of Acquiring Capital Equipment or Real Estate. Source: Industry Week, 17 November 1997 LATE IN 1996 A CUSTOMER APPROACHED Beacon Group, asking whether the Bloomfield, Conn.-based manufacturer of aircraft engine parts would be interested in providing a new type of ma- chining. In order to obtain the order and handle the work, Beacon would have to add several CNC turn- ing centers to its shop floor. Beacon wanted to respond quickly, as the opportunity to enter a new market--client in hand--would not last forever. However, prudence was imperative. "The aerospace industry has long-term business cycles," controller Dana Maker says. "Right now, it's doing quite well. But we can only look ahead a couple of years." In addition, entering a new market presented some business risk, although management was confi- dent of its ability to succeed. To meet the dual requirements of speed and safety, Beacon worked with AT&T Capital Corp. to struc- ture a six-year lease for the machines. The size of the deal exceeded $1 million. Maker says the turning centers were up and running four months after the company first decided to acquire them. In addition, by leasing the machines instead of buying them, the company was able to match its cash flow to the fore- casted duration of the business cycle. At the same time, the cost of the deal was comparable to Beacon's other financing alternatives, which in- cluded buying the machines outright or borrowing funds to purchase them. "On a cost-of-capital basis, leasing was the cheapest," Maker says. "Leasing companies have access to capital less expensively than we do." The deal marked the first significant leasing transaction for the 50-year-old company. Many other firms are finding that leasing can be a cost-effective way to acquire capital equipment and real estate. Once considered by some a financial tool of last resort, leasing has gained credibility. Leases accounted for approximately 30%, or $169 billion, of the amount that businesses invested in pro- ductive assets in 1996, reports the Equipment Leas- ing Assn., an Arlington, Va.-based trade association. That number is expected to rise to $176 billion in 1997. More than three-quarters of U.S.-companies lease at least part of their equipment. There are several reasons why leasing can be a cost- effective means of acquiring an asset. Often a lessor is better able to take advantage of the deduction for depreciation expense that comes with ownership. The savings are passed on to the lessee through lower lease rates. Mobil Corp. has been able to benefit from a transfer of depreciation benefits, says Richard Sliwinski, sen- ior financial adviser with the Fairfax, Va.-based en- ergy and petrochemicals giant. Mobil has completed several sizable leasing deals. The most recent one was a transaction with Sumitomo Bank Leasing & Finance Inc. for a commercial tanker. The size of the deal was in the tens of millions of dollars. Sliwinski says that Mobil has been subject to the al-
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21-1 Leasing - To Buy or not to Buy? Once a Last Resort,...

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