Purchase options allowing the lessee to purchase the

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Unformatted text preview: shorter than the usable life of the leased assets. Purchase options allowing the lessee to purchase the leased asset at maturity, typically for a prespecified price, are frequently included in both operating and financial leases. The lessor can be one of a number of parties. In operating leases, the lessor is likely to be the manufacturer’s leasing subsidiary or an independent leasing company. Financial leases are frequently handled by independent leasing companies or by the leasing subsidiaries of large financial institutions such as commercial banks and life insurance companies. Life insurance companies are especially active in real estate leasing. Pension funds, like commercial banks, have also been increasing their leasing activities. The Lease-versus-Purchase Decision lease-versus-purchase (lease-versus-buy) decision The decision facing firms needing to acquire new fixed assets: whether to lease the assets or to purchase them, using borrowed funds or available liquid resources. Hint Although, for clarity, the approach demonstrated here compares the present values of the cash flows for the lease and the purchase, a more direct approach wou...
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