|
Grand Rapids, MI | I do lease vs. purchase analysis all the time professionally, here are some things to consider:
1. I generally do a net present value analysis to look at the timing of cash flows and the time value of money. Typically a lease ends up costing you less cash flow up front. If capital is tight and you place a high value on it, that will tip toward leasing. Fast growing businesses sometimes like to lease because they would rather take their capital to fund growth, which will return them more than tying up capital into equipment. On the other hand, if you are fine for cash, and looking for places to invest your capital, you will probably lean toward purchasing.
2. For tax issues, there are capital leases and operating leases. Operating leases allow one to write off the amount of the cash lease payment as a direct expense, then if the asset is purchased it would start depreciating then. Capital leases are treated just like you purchased the asset for tax purposes. There are specific rules that help decide which is which, check with your tax advisor. Skipper is right that an operating lease does not allow Sec 179 deduction, but a capital lease would. Some people are not elgible for sec 179 or have maxed it out. If you buy more than $430,000 worth of qualifying assets in a year your deduction is phased out until you reach $538,000 (2006 limits)
3. Leasing can help a balance sheet. An operating lease would not be recorded on the asset or liability side of the balance sheet. You might think this balances out, and it does from a net worth perspective, but it really can change the ratios. Try an example for yourself.
4. Watch out for leases. I know there used to be a big ag leasing company that said they couldn't tell you the interest rate...lol. It was because the rate they were using was 500 basis points higher than lending rates. A good finance guy can back into those rates in no time, and see what you are really paying. e-mail me the numbers if they will not tell you the underlying rate in the lease and you want to know.
5. If you can get a high buyout price, you have the ability to walk away after the end of the lease. Many leases I have been seeing lately have pretty low buybacks so that the chances of you not buying back the asset to either use or trade in at the end of the lease is pretty low.
Hope this helps, let me know if you have any other questions, or you would like me to do a professional analysis of the options.
Loren | |
|
New or used MFD/ Lease or Buy
