6.

Leasing
what is lease and lease contact or agreement
2/2
A lease is a legal agreement between two parties, where the owner of a property (known as the
"landlord or lessor) grants the right to use that property to another party (known as the "tenant or
lessee ") for a specified period of time, in exchange for payment of rent.

A lease contract is the written document that outlines the terms and conditions of the lease
agreement between the landlord and the tenant. It typically includes details such as the length of the
lease, the amount of rent to be paid, the payment schedule, the responsibilities of both the landlord
and the tenant, and any other terms and conditions that apply to the use of the property. A lease
contract is a binding legal agreement and is enforceable by law.
define operating lease and financial lease and leverage lease
An operating lease and a financial lease are two different types of leases used in business
transactions. Here's a brief definition of each:

1. Operating Lease: An operating lease is a type of lease in which a company leases an asset
from a lessor for a specific period of time, typically less than the useful life of the asset. The
lessor retains ownership of the asset and is responsible for maintaining and insuring it. The
lessee pays rent to the lessor, but does not assume the risk of ownership or any residual
value at the end of the lease term.
2. Financial Lease or capital lease: A financial lease, also known as a capital lease, is a type of
lease in which a company leases an asset from a lessor for a specific period of time, typically
for the useful life of the asset. Unlike an operating lease, the lessee assumes the risks and
rewards of ownership and is responsible for maintaining and insuring the asset. At the end of
the lease term, the lessee may have the option to purchase the asset at a predetermined
price, known as the residual value.
3. A leverage lease is a type of leasing arrangement where a company uses debt financing
to purchase an asset and then leases it to another company for use. The lessee typically
makes regular lease payments to the lessor, which are used to pay off the debt used to
acquire the asset. This allows the lessor to achieve a higher return on investment than if
they had purchased the asset
how would you determine whenever leasing or buying an asset
The decision to lease or buy an asset depends on a number of factors, including the cost of
the asset, the length of time it will be used, the availability of financing, and the expected
cash flows associated with each option. One way to compare the two options is by using the
net present value (NPV) analysis.
To determine which option is better, you can calculate the NPV of each option and compare
them. NPV is the difference between the present value of the expected cash inflows and the
present value of the expected cash outflows. In this case, the cash inflows would include any
savings, revenue, or tax benefits associated with the asset, while the cash outflows would
include any costs associated with purchasing or leasing the asset.

1
6. Leasing
If the NPV of leasing is higher than the NPV of buying, then leasing may be the better option.
Conversely, if the NPV of buying is higher than the NPV of leasing, then buying may be the
better option.
However, it is important to note that NPV analysis is not the only factor to consider when
making this decision. Other factors, such as tax implications, the impact on cash flow, and the
flexibility of the lease agreement, may also be important to consider. Additionally, some
companies may prefer leasing for accounting or budgeting reasons, even if buying is
technically more financially beneficial. Ultimately, the decision to lease or buy an asset should
be based on a comprehensive analysis of all relevant factors.

Advantages of leasing:

1. Lower initial costs: Leasing typically requires little or no down payment and lower
monthly payments compared to buying, making it more affordable for businesses or
individuals with limited funds.
2. Access to newer equipment or assets: Leasing allows businesses or individuals to access
the latest equipment or assets without having to purchase them outright.
3. Tax benefits: In some cases, leasing can offer tax benefits, such as deducting the lease
payments as business expenses.
4. No worries about depreciation: When leasing, the lessor typically assumes the risks of
depreciation and obsolescence, so the lessee does not have to worry about the value of the
asset decreasing over time.
5. Flexibility: Leasing agreements can be customized to fit the specific needs of the lessee,
including the length of the lease, payment structure, and end-of-lease options.

Disadvantages of leasing:
1. Higher overall costs: Over time, leasing may cost more thanpurchasing the asset outright due
to the interest and fees associated with thelease.

1. No ownership: The lessee does not own the asset and has to return it at the end of the
lease, which can be a disadvantage if the asset is essential to the business or if the lessee
has made significant customizations to it.
2. Limited flexibility: Once the lease agreement is signed, the terms cannot be changed, and
the lessee may be penalized for terminating the lease early.
3. Potential penalties: If the lessee exceeds the mileage limit or damages the leased asset,
they may be subject to additional fees or penalties.
4. Limited choice: The lessee may be limited in their choice of equipment or assets, as they
can only lease what is available from the lessor, and may not be able to customize the
asset to their specific needs.