Leasing

Lease: A rental agreement for the use of an asset, that extends for a
year or more and involves a series of fxed payments is called a
lease.
The owner is the Lessor, while the user is the Lessee.
When the lease contract expires, asset reverts to the lessor.
However, the lease agreement often gives the lessee the option
usually, for capital leases! to purchase the asset or renew the
lease.
Types:
"perating Lease: #hort$term or cancella%le during the contract
period at the option of the lessee. &enerally, for the use of the asset
for short$term purposes.
'apital( )inancial Lease: *xtending over the economic life of the
asset and cannot %e cancelled or can %e cancelled only through
reim%ursement of losses to lessor. &enerally, a source of fnancing.
By Services:
)ull$service( +ental Lease: Lessor maintains, insures and pays asset
taxes if any! on the asset.
,et Lease: Lessee agrees to maintain, insure and pay asset taxes if
any! on the asset.
By Arrangements:
-irect Lease: Lessee identifes asset, arranges for lessor to %uy from
manufacturer, and signs lease contract with lessor.
#ale$and$Lease%ac.: Lessee sells asset already owned and leases it
%ac. for the long$term/ therefore, continues to %e a%le to use the
asset %ut no longer owns it.
Why Lease0
'onvenient
'ancella%le options are valua%le
1aintenance is provided
#tandardi2ation leads to low administrative and transaction
costs
Tax shields
3reserves capital
Operating Lease Problem
A car costs T.. 4.5 million, has a seven$year useful life and re6uires
T..78,888 per year maintenance cost. What is the %rea.$even lease
rental amount0 r 94:; and t 9 :<.7;
Note: The e6uivalent lease payments have to %e calculated %efore$
taxes, i.e. after calculating the 31T amount, divide %y 4$t!, since
there are tax shields accrued from the lease payments.
Financial Lease
A car costs T.. 4.5 million, has a seven$year useful life. The car
seller gives you an option to lease the vehicle for eight =! payments
of T.. >78,888 frst payment due now!. Are you %etter o? %orrowing
money to %uy the car or leasing it0 r 94:; and t 9 :<.7;
#ince this is a de%t$e6uivalent cash @ow, use after$tax cost of de%t
as the appropriate discount rate.