Leasing versus Buying

As far as the lessee is concerned, it is the use of the asset that is important, not necessarily who has title to it. One way to obtain the use of an asset is to lease it. Another way is to obtain outside financing and buy it. Thus, the decision to lease or buy amounts to a comparison of alternative financing arrangements for the use of an asset.

Figure 26.1 compares leasing and buying. The lessee, Sass Company, might be a hospital, a law firm, or any other firm that uses computers. The lessor is an independent leasing company that purchased the computer from a manufacturer such as Hewlett-Packard (HP). Leases of this type, in which the leasing company purchases the asset from the manufacturer, are called direct leases. Of course, HP might choose to lease its

own computers, and many companies, including HP and some of the other companies mentioned previously, have set up wholly owned subsidiaries called captive finance companies to lease out their products.3

As shown in Figure 26.1, whether it leases or buys, Sass Company ends up using the asset. The key difference is that in one case (buy), Sass arranges the financing, purchases the asset, and holds title to the asset. In the other case (lease), the leasing company arranges the financing, purchases the asset, and holds title to the asset.

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