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Lease Vs. Buy

Essay by   •  May 6, 2011  •  578 Words (3 Pages)  •  1,178 Views

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The scenario for this simulation was to determine the difference between leasing and buying assets. When trying to decide between leasing and buying an asset, it is important to compare the present value of the outflows involved. The company in the simulation is Bonnesante Research, a high risk, very high profit, biotech start up based out of Irvine, California. The beginning stages of the company's life are extremely important when deciding between leasing and buying assets.

In the first scenario, the task was to choose between leasing and purchasing a mainframe computer. Leasing the mainframe computer for the running of advanced analytical software rather than buying the mainframe computer would be in the best interest of Bonnesante. Leasing is a more favorable option over buying since computer technology develops so rapidly. More than likely, Bonnesante will need to upgrade the computer mainframe once newer and faster technology is available. If Bonnesante were to purchase the computer mainframe, the company would most likely need to replace the current mainframe, thus creating another cost in the upcoming years. The leasing option allows Bonnesante no down payment for a year and a half. It also has a lower present value of cash outflows when compared to buying the mainframe computer. In the first scenario, leasing the computer mainframe would be in the best interest for Bonnesante.

In the second scenario, the task was to acquire an advanced digital spectrometer for research and development. Bonnesante has the option to either purchase the digital spectrometer, an operating lease, or a capital lease. It is 2 million dollars to buy the equipment. This is too large of an amount to consider purchasing, so the options are down to the two leasing options. It is important to look at the present value when deciding between these two options. An operating lease would have a present value of just approximately 2.2 million and the capital lease is at almost 3 million. By putting a down



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