LEASE  A LEASE REPRESENTS AN AGREEMENT THAT GIVES CONTROL OVER ASSETS OWNED BY THE LESSOR TO THE LESSEE FOR A SPECIFIC PERIOD OF TIME UPON THE PAYMENT.

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Presentation transcript:

LEASE  A LEASE REPRESENTS AN AGREEMENT THAT GIVES CONTROL OVER ASSETS OWNED BY THE LESSOR TO THE LESSEE FOR A SPECIFIC PERIOD OF TIME UPON THE PAYMENT OF AN AGREED- UPON PAYMENT, RENT.

TYPES OF LEASES  IN NON-REAL ESTATE LEASING THERE ARE SEVERAL TYPES OF LEASES:  OPERATING LEASE  CAPITAL (OR FINANCIAL) LEASE  CUSTOM HIRE

OPERATING LEASE  USUALLY A SHORT-TERM RENTAL ARRANGEMENT IN WHICH THE RENTAL CHARGE IS CALCULATED ON A TIME BASIS.  SUCH AS THE HOUR OR THE DAY, ETC.  THE LESSEE PAYS THE DIRECT COST SUCH AS FUEL AND LABOR.

CAPITAL OR FINANCIAL LEASE  A LONG - TERM CONTRACTUAL ARRANGEMENT IN WHICH THE LESSEE ACQUIRES CONTROL OF AN ASSET IN RETURN FOR RENTAL PAYMENTS.  USUALLY RUNS FOR SEVEAL YEARS AND CANNOT BE CANCELLED WITHOUT PENALTY.

 IS FULLY AMORTIZED, MEANING THAT THE PRESENT VALUE OF THE LEASE PAYMENTS EQUALS THE FULL PRICE OF THE LEASED EQUIPMENT.  MAY HAVE A PRUCHASE OPTION AT THE END OF THE LEASE.

CAPITAL VS. OPERATING LEASE  CAPITAL LEASE TRANSFERS SOME OF THE RISKS OF OWNERSHIP TO THE LESSEE.  MEETS AT LEAST ONE OF THE FOLLOWING REQUIREMENTS:  (1) OWNERSHIP TRANSFERS TO THE LESSEE BY THE END OF THE LEASE TERM

 2) LESSEE HAS AN OPTION TO PURCHASE THE PROPERTY AT A BARGAIN PRICE.  3) THE LEASE TERM IS FOR 75% OR MORE OF THE REMAINING USEFUL LIFE OF THE ASSET.  4) THE PRESENT VALUE OF THE LEASE PAYMENTS IS EQUAL TO OR MORE THAN THE FAIR MARKET VALUE OF THE PROPERTY

ISSUES IN CAPITAL LEASING  ADVANTAGES:  CONSERVATION OF WORKING CAPITAL  NEARLY 100% FINANCING  THE USE OF MODERN EQUIPMENT  POSSIBLE TAX BENEFITS

EVALUATION OF A LEASE VS. PURCHASE  MAY BE EVALUATED BY LOOKING AT THE PRESENT VALUE OF CASH FLOWS FOR EACH OPTION.

PROBLEM  $ 30,000 TRUCK  35% TAX BRACKET  12% COST OF CAPITAL  PRUCHASE  30% DOWN PAYMENT  LEVEL PAYMENTS  10% INTEREST  5 YEARS  LEASE  5 YEAR LEASE  ANNUAL PAYMENTS OF $7,000