Analyzing Lease Vs. Buy Decision

Analyzing Lease vs. Buy Dec

To buy or not to buy is the question for many companies acquiring assets for their business. Equipment and other assets are extremely important when a company is trying to get off the ground in a new business. The chief executive officer would have to ask how would we finance the equipment needed, pay back investors, and make the company profitable for all.

This new biotech company is seeking financial remedies in becoming a profitable company. Bonnesante` Research Company has 30 employees and located in Irvine, California. They operate on venture capital funding now, which are investors that are offered a stake in a company that has risk of failing or being very profitable. Acquisitions are Bonnesante` major focus area as the company's operations start to gather pace. The company has to decide whether to lease or buy equipment to achieve their goal to stay in the positive. In 2xx1, Bonnesante` Research Company future hinged on summiting the development of an anti-infective drug to the Food and Drug Administration. In 2xx4, the company was making a profit therefore; they required an advanced digital spectrometer to achieve key breakthroughs in their research and development department. They company was doing so good that in 2xx7 Bonnesante` Research Company plan to transform the company into a fully integrated pharmaceutical company with its own marketing and manufacturing operations. With the help of key players like Samuel Malone the chief executive officer, Nicholas Tortelli the chief operating officer, and. Ana Machuca and Consultant.

In 2xx1, Bonnesante` required a mainframe computer in their research and development department, so that they would have the ability to run advance analytical software. Their first drug needs to pass trials for the Food and Drug Administration so a mainframe to run the analytical software. They have found a mainframe computer that has both lease and buy options but they need to see the effects of the financing on their cash flow statement. The company has to look at the present value of the outflows for leasing and present value of the outflows from buying the mainframe computer.

Now they have to select the optimal mode of financing the acquisition by evaluating the lease and buy options available to them. The available options are at the interest rate of 6 %:

Operating Lease Buy Comparison Table

Terms (months) 24 Terms (months) 24 Present Value ($000)

Down Payment 37,736 Down Payment 220,145

Security Deposit 51.41 Maintenance ($000) 130.00 Operating lease 578

Monthly Payments 25.16 Monthly Payments 55.04 Buy 1844

Samuel Malone the chief executive officer feel that mainframes are being obsolescence and unattractive. Nicholas Tortelli the chief operating officer feels that it would be a long-term strategy and can depreciate the computer. Ana Machuca Consultant feel that the company is not profitable right now and depreciation would not help us gain anything. She also feels that the loan would affect the balance sheet and leasing the mainframe will go on the cash flow statement where we want it to be. .

For Bonnesante` financial team the decision was to lease the mainframe computer because the loan options have significantly higher outflows. Moreover, the lease option selected by Bonnesante` of 24 months with a down payment of one-and-a-half months lease amount, has the lowest present value of cash outflows for this duration. A loan driven purchase, however: would require the company to record the asset and a corresponding liability on the balance sheet. Both depreciation and interest payments would be recorded as expenses. Normally, these lower the outflows associated with a loan. However, Bonnesante` is not taxed, and these expenses would not be tax-deductible from the outflows involved in a loan based purchase This makes the case for a lease even stronger.

In 2xx4, Bonnesante` needs to acquire an advance spectrometer to achieve key breakthroughs in the research and development department. Their options are a short-term operating lease, capital lease that is for a longer duration and a loan to buy the spectrometer outright. They would need to evaluate the duration they would need the equipment, the present value of financing, and the impact on the balance sheet. The available options are at the interest rate of 6 %:

Operating Lease Buy Capital Lease

Terms (months) 36 Terms (months) 40 Terms (months) 42

Down Payment 92,025 Down Payment 113,608 Down Payment 82,827

Security Deposit 124.03 Maintenance ($000) 160.00 Security Deposit 110.42

Monthly Payments 62.02 Monthly Payments 56.80 Monthly Payments 55.22

Comparison Table

Present Value ($000)

Operational Lease 1,781 Capital Lease 1,835 Buy 2,224

Samuel Malone the chief executive officer feels that the equipment is crucial to their research and development department and be a good long-term investment. He would prefer a capital lease to an operational lease. Nicholas Tortelli the chief operating officer feels that the company should buy the equipment needed because there is not much obsolescence of such equipment in 5 years. He is also against the capital leasing of the equipment. Ana Machuca Consultant feels that the operating lease does not offer the company any advantages. She also thinks that the capital lease or buying the equipment then the company could claim depreciation on the equipment. .

For Bonnesante` financial team the decision to take a loan of 40 months with a