Leasing

It is an agreement between a lessor, the owner of the

asset and lessee. Under the contract ,the owner gives
the right to use the asset to the user over an agreed
period of time, for a consideration called lease rental.

Parties:

Lessor
Lessee
 Types of leasing
Operating lease
Financial lease
Sale and lease back
Leveraged lease
Cross-border
Closed and open ended lease
Direct lease
Dry lease and wet lease
Net Net Net lease
Updated lease
Percentage lease
Hire Purchase:

It is a peculiar type of transaction in which goods are let on hire

with an option to the hirer to purchase them, with the following
stipulations:

1. Payment has to be made in instalments over a specified period.

2. the possession is delivered to the hirer at the time of entering
into the contract.
3. the property in the goods passes to the hirer on payment of the
last transaction.
4. each instalment is trated as hire charges so that if a default is
made in payment of any instalment, the seller becomes entitled
to take away the goods and
5. The purchaser is free to return the goods without being required
to pay any further instalment falling due after the return.
Parties involved in hire purchasing:

Seller
Hirer (Purchaser)

Leasing Vs Hire Purchasing:

These two modes of financing differ in the following aspects:

1. Ownership
2. Depreciation
3. Magnitude of funds
4. Extent of financing
5. Maintenance
6. Tax benefits
Financial Evaluation of Hire purchase:

From the view point of hirer:

Decision criterion: The decision about from the point of view of a

hirer is the cost of hire purchase vis-à-vis the cost of leasing. If the cost
of hire-purchase is less than the cost of leasing, the hirer should prefer
the hire purchase alternative and vice versa

Cost of hire purchase:

1. Down payment
2. Plus: Service charge
3. Plus: PV of hire purchase discounted by cost of debt (kd)
4. Minus: PV of depreciation tax shield discounted by cost of capital
(Kc)
5. Minus: PV of the net salvage value discounted by cost of capital
(Kc)
Cost of Leasing:

1. Lease management fee

2. Plus: PV of lease payment discounted by (Kd)
3. Less: PV of tax shield on lease payment, and lease
management fee, discounted at (Kc).
4. Plus: PV of interest tax shield on hire purchase, discounted by
Kc