Final Exam
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Stacey R. Cook
MGMT575: Financial Analysis and Management II
May 2, 2012
Joel Light
Southwestern College Professional Studies
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Introduction
The basis of this report was to be able to take a closer look into the subject matter of
Financial Analysis and Management II, and explain what items that were covered over the
duration of six weeks were informative and helped with developing skills that will be detrimental
to a successful future within a Business Administrative position. The topics that will be covered
within this report will be leasing vs. Buying for a company seeking new equipment (Brealey,
Myers and Allen).
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Introduction
Financial Analysis is imperative for the success of a business or company. Managers
within a company or business need to be able to analyze what ventures would be able to provide
income for the company and whether the ventures would also gain stock holders to invest within
the company as well. Managers need to be able to provide in depth analysis before presenting
ideas to those surrounding them within the company. However, if a company is not necessarily
willing to take any risks and invest in ventures, then the company has not gained any potential to
move forward. In order for a company to be able to succeed it needs to be able to spend money
in order to make money.
Examples of spending money in order to make money may fall under concepts such as
Leasing vs. Buying .Companies need to be able to spend money on dependable items to ensure
that the products that the company is producing are more than acceptable to distribute to their
customers, therefore the company will most definitely need to invest in machinery, etc. that will
allow them to do so. However, a manager needs to be able to determine whether or not leasing
the items that the company needs to succeed is a better direction to precede then that of actually
purchasing the items needed to succeed.
Leasing vs. Buying
Leasing vs. buying may be a difficult type of determination that is made by a manager of
a company. There are both advantages and disadvantages associated with the two. However, it is
important for a manager to be able to ask certain questions before coming to conclusion of what
he or she may want to do as far as either Leasing vs. buying. Leasing can be determined as the
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company not owning the equipment that they are in fact spending company funds to use and
allowing for the leasing company to spend the funds for any type of repairs that may be required
for proper maintenance of the equipment and the company may have a separate insurance policy
established in those just in case times. Buying the equipment would give the company
ownership, however, the company would be at full accountability for maintenance of the product
and may cost more expenses for the company with ownership.
Advantages of Leasing
There are many advantages to leasing for a company. Leasing equipment and tools
preserves capital and provides flexibility that may cost more for a company in the long run.
Some of the advantages are:

Less initial expense- leasing allows for a company to acquire assets with
minimum expenditures. (NOLO) Equipment leases often times do not require a
down payment; therefore a company can obtain goods that it may need without
significantly affecting its cash flow.

Tax deductible- lease payments can usually be deducted as a business expense for
a business tax return. This could actually be a significant advantage for a
company because it could reduce its net cost of the company’s lease. (NOLO)

Flexible terms- A lease may be easier for a company to obtain because there are
more flexible terms then with loans for a company looking to buy equipment.
This could be an advantage for a company that may have bad credit because there
may not necessarily be a credit check utilized or a company can often extend the
lease terms for longer if the need arises.
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Equipment upgrade capability- If a company decides to lease equipment and
during the terms of their lease agreement, the equipment is deemed obsolete, then
it is the obligation of the less or to be able to allow for the company that is leasing
the equipment to be provided current equipment after the terms of the original
lease expire.
Disadvantages of Leasing
Although there are many advantages for a company to lease equipment and tools, there
are associated disadvantages that a company faces when leasing equipment as well. Some of the
disadvantages of leasing are as follows:

Higher overall cost- If a company chooses to lease equipment then actually
purchasing the equipment, there is a higher expense to do so. For example, a 3year lease on a computer that is worth $4,000, at a standard rate of $40/month per
$1,000, will cost a company $5,760 by the time the terms of the lease have been
completed, however, if the company decided to purchase the computer outright it
would only cost them the original $4,000.

The company does not own the product- There is no real way for a company to be
able to earn any type of equity on the product while it is being leased.

Obligation to pay entire lease term- A company is required to make payments
towards the lease agreement regardless if they are still using the product or
equipment that they are leasing. (NOLO) Also, if a company decides that no
longer require the use of the leased item, there will usually be a heavy termination
fee that is associated with early termination of the lease agreement.
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Advantages of Buying Equipment
Although when a company decides to purchase the equipment vs. leasing the equipment,
there are many advantages associated with that concept. Ownership may actually be a huge
factor for some companies. Here are more advantages a company may want to take into
consideration:

Tax incentives: Within the first full year of ownership of the product, a
company can deduct some of the assets of the initial cost of the product. For
example, if a company falls into the 25% tax bracket and the company
purchased $100,000 in business equipment this year, the net cost to the
company is only $75,000.

Possibility of depreciation deduction- A company could still receive tax
savings for most business equipment through depreciation of the product or
products.
Disadvantages of Buying Equipment
Tax incentives could seem to motivate a company to purchase the product or tool out
right, however, there are some disadvantages associated with purchasing equipment out right as
well.

Higher initial expense- For some companies, paying the initial cost of the
equipment may be something that makes the company face its final
determination of whether or not they truly want to spend a lump sum of
money to purchase the item outright or not.

Getting stuck with old equipment- Once a company decides to purchase
the item, it may actually fear that the it could get stuck with old outdated
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equipment, especially with technological merchandise, as it seems as
though technology is constantly changing.
Conclusion
When a company is deciding to buy or lease, it is important for the managers to be able to
determine the approximate net cost of the asset in which the company may want. A manager
needs to be able to factor in the tax breaks that are associated with the equipment and the resale
value as well. A manager needs to be able to determine which option is cost effective for the
company and once that determination is made, also be able to establish other intangibles of
whether or not the product will become obsolete within the near future or if the company’s need
for the product could perhaps expire before the terms of the lease agreement have been met.
Final Exam
References:
Brealey, R., S. Myers and F. Allen. Principles of Corporate Finance: 10th ed. New York:
McGraw-Hill Irwin, 2011.
NOLO. Business Equipment: Buying vs. Leasing. 2012. 02 May 2012
<http://www.nolo.com/legal-encyclopedia/business-equipment-buying-vs-leasing-29714.html>.
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