17.12 : Financial Decision-Making in Leasing

Leasing and purchasing are two fundamental approaches to acquiring business assets, each with distinct financial and operational considerations. A thorough evaluation of their impacts enables businesses to make informed choices that align with strategic objectives.

Purchasing an asset involves an upfront cost, ongoing maintenance expenses, and potential benefits such as annual cash inflows, tax advantages from depreciation, and a salvage value at the end of the asset's useful life. These elements collectively determine the net benefit of ownership. In contrast, leasing typically involves fixed annual payments over the lease term, simplifying budgeting and preserving upfront capital but lacking the residual value or ownership benefits of a purchased asset.

The financial comparison between leasing and purchasing hinges on net cash inflows, maintenance costs, tax implications, and salvage value. For purchasing, net cash inflows are calculated after deducting recurring expenses like maintenance, and the asset's residual value is factored into the total benefit. Leasing eliminates the responsibility for maintenance and ownership but incurs steady cash outflows that must be evaluated against the potential returns of ownership.

Businesses can employ financial tools such as discounted cash flow (DCF) analysis to assess the present value of leasing and purchasing options, incorporating the time value of money. Tax considerations and operational goals should also be weighed to determine the most advantageous approach.

By systematically analyzing these factors, organizations can choose an asset management strategy that balances financial efficiency with operational flexibility, supporting long-term growth and profitability.