A finance lease or capital lease is a type of lease A finance lease or capital lease is a type of lease. It is a commercial arrangement where: the lessee (customer or borrower) will select an asset (equipment, vehicle, software); the lessor (finance company) will purchase that asset; the lessee will have use of that asset during the lease; the lessee will pay a series of rentals or installments for the use of that asset; the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee; the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price);

The finance company is the legal owner of the asset during duration of the lease. However the lessee has control over the asset providing them the benefits and risks of (economic) ownership

An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment Short term hire of equipment for a project – fork lift, cherry picker, refrigeration unit, - like a rental agreement

Novated leases in Australia In Australia, a novated lease is generally a three way agreement ("novation agreement") between an employer, employee and lease company, under which the employee leases a vehicle from the lease company, and employer agrees to take on the employee's obligations under the lease. Normally, the employer then makes the lease payments on behalf of the employee, and deducts them out of the employee's pre-tax income (known as salary packaging a vehicle). Vehicles salary packaged through a novated lease attract Fringe Benefits Tax (FBT) in Australia. However, FBT is treated concessionally for vehicles, so novated leasing may be a tax-effective way for an employee to purchase a vehicle, depending on the type of vehicle, kilometers travelled annually, FBT method used, employee's salary and all the fees, charges and lease interest rate charged by the Nominee.

A leveraged lease is a lease in which the lessor puts up some of the money required to purchase the asset and borrows the rest from a lender. The lender is given a secured interest on the asset and an assignment of the lease and lease payments. The lessee makes payments to the lessor, who makes payments to the lender. The term may also refer to a lease agreement wherein the lessor, by borrowing funds from a lending institution, finances the purchase of the asset being leased. The lessor pays the lending institution back by way of the lease payments received from the lessee. Under the loan agreement, the lender has rights to the asset and the lease payments if the lessor defaults. In this type of lease, the lessor provides an equity portion (often 20% to 50%) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership.

Next slide has new Calculator buttons to push

New Calc buttons for previous slide question 2nd F, ALPHA, 0, 0 – to clear previous cash flows 10500, +/- , ENT , 11375 , ENT , ENT , ENT , ENT , 21875 , ENT (all cash flows are in) (Now enter the interest rate or cost of capital) 2nd F , Cfi , 10 , ENT , , COMP for NPV

Note this is your worksheet – you can save writing by using abbreviations on your worksheet – for example Period 1 – 10 has the same cash flow so you could write 1 – 10 …. 3000 +

In the previous example should we also include the cost of interest in coming up with the $170,000 to purchase – and if we do we should come up with the interest to find the lease payment of $40,000 – so perhaps the following workings are more accurate? Assuming it was an interest only loan – flat rate of interest $170000 x .09 = 15300 and the lease payment – 40000 x .09 = 3600, and is it fair to say that by year 2 under the lease option we have had to fund 2 years payments of $40,000 – therefore $7200 etc.

Workings for the purchase option …….