Sample Term Paper on Lease versus Purchase

Introduction

Before settling on whether to buy or lease, it is important to give a careful thought on the needs of the institution. According to Groppelli and Nikbakht (2006), a buyer should always work on a step-by –step comparison prior to making a choice on whether to lease or purchase.  Proper thought should be given on the fiscal, taxes as well as hospital-specific elements. The option settled for should provide the least net cost, thus the cheaper option should be embraced. Prior to settling on the way to go, it is important to consult with the facility accountant on the legal and financial considerations of the opted option. In addition, it is crucial to determine the period the item is needed. That is, one should determine whether the property is needed for long-term or short-term use.  It is not a wise idea to purchase a very expensive an item that is needed for short-term use. This is because leasing in this case will be a good option compared to buying as the item may be sold after some time.

Lease Options

During the leasing process, an advocate may be hired to draft the documents as well as explain the rights of the parties and explain the consequences that may accompany any default to terms of agreed upon. Moyer, McGuigan and Kretlow (2009), cited that appropriate comparison should be done between leasing and leasing to buy. In a lease option, the buyer pays the purchaser optional money to be able to later purchase the item. The two parties settle on the purchase price and the lessee agrees to pay the market value at the point of the lease exercise. At times, the buyer may accept to lease the property from the seller at premeditated rental value. In most cases, the option money is not applicable to the down payment and is majorly non-refundable.

During the leasing period, nobody purchases the equipment the seller if free to assign the leasing options to other individuals but without any approvals.  The leasing options expire when the buyer refuses to exercise the option and buys the equipment.

The Advantages and Disadvantages of Lease versus Purchase
Available Capital

Buying is predisposed to high monetary outlay as one may opt for a lender, which may not be the best option if the facility does not have adequate cash supply. On the contrary, leasing needs less capital and the monthly payments are lower. Leasing gives the health care facility an opportunity to rent a wider variety of property compared to buying as the facility will only be able to purchase few equipment. This is boosted by the fact that the healthcare facility has space to keep the equipment as well as an already created impression. The buyer stays within their budgets, as their buyers are able to get equipment they were not able to acquire on cash. In case the facility has adequate capital and a constant flow of income, the administration should settle for purchasing of the item as five years may be a long time while using an item on lease.

Management Responsibilities

Leasing allows the administration adequate time to manage other affairs in the facility. This is especially workable in situations where the leaser maintains an entire control of the equipment. The property will be within the heath facility but the leaser will keep monitoring how the equipment is used.  To effectively maximize the accessibility of the equipment and get the best of its availability, a team should be trained on how to use the facility. The management should coordinate the affairs of the facility as well as co-operate with the team that will be running the equipment.

Long-Term Costs

The fact that leasing is not a long-term financial commitment lowers any cases of risks associated with the use of the equipment. Risk related issues are best managed by signing a contract on crucial issues like fixing a time frame for the lease of the property. When the agreement period expires, the property is returned to the owner. When the period under which the equipment is leased is longer, the costs involved are high. At such incidences, a lease purchase will be the best option. As much as leasing offers a faster response to the needs of the facility, the costs involved in leasing are very high when analyzed on a long-term plan. This is because of annual increases in rent majorly with the consumer price index. Further price escalations are witnessed when the leases are renewed.

Ownership

The health care facility will not have full control over the leased property. If the health facility does not have equity in the property, the lease payments will build the equipment owner’s equity. The obligations that accompany the leasing process come with hidden expenses that are catered for by the leaser, as the lessee does not fully own the equipment. This is because when a lease is signed, hidden costs should be accounted for in the total costs of the lease (Smith, 2002).

Protection against Obsolescence

The facility accountant should be involved to offer an advice on the asset acquisition. The productivity of the asset should be direct proportional with its liability of the acquired assets. The leasing term should be matched with the functional life of the property. Moreover, the health care facility can opt to balance the payment mandate with the duration which the facility will produce revenues. Just like any other business entity, the health care facility staff should protect the equipment against the escalating rate of depreciation.

Tax Considerations

An option to purchase is usually accompanied by an increased financial outlay priory. This is in addition to financing of the purchase done through a lender. This becomes a viable option as the facility has enough cash to finance for the same. Analyzing the benefits from the taxation point of view, all the tax implications in relation to the healthcare situation were considered for the two options. A critical analysis reveals there exists tax benefits in leasing in situations where the entire lease payments are deducted immediately. In cases where buying is embraced, deductions are done on the interests on the expenses. The principal amount paid on the loan is not deemed as a deduction on the taxes on the firm’s profit/loss statement.

Conclusion

A buyer should analyze the needs of the business before settling on lease options. The preferred option should best fit the situation after considering factors like taxations, available capital, the duration the item is needed as well as protection against obsolescence. The lease option embraced should serve the interest of the facility.

References

Groppelli, A. A., & Nikbakht, E. (2006). Finance. Hauppauge, N.Y: Barron’s.

Moyer, R. C., McGuigan, J. R., & Kretlow, W. J. (2009). Contemporary financial management. Mason, OH: South-Western/Cengage Learning.

Smith, S. G. (2002). Managerial accounting for libraries & other not-for-profit organizations. Chicago: American Library Association.