Professional Documents
Culture Documents
LEASING
A transaction in which owner of the
asset (lessor) provides the asset for use
to another (lessee) for a certain period
of time for consideration in periodic
payments (Rentals), with or without
down payment.
Types of Lease
Financial
Operating
Leveraged
Sale
Full
& Leaseback
Payout
Specialized
Service
Sales
Aid
Small
Cross
Border Lease
Financial
Lease
Lessee
Lessee
Operating Lease
Lessee
Non cancellable
Covered with
single lessee
Not covered
Not covered
Lessor
Cancellable
Not covered with
a single lessee
Covered
Covered
Full payout
Non payout
Lessor
Lessor
Qualitative Advantages to
Lessee
Qualitative Advantages to
Lessee
Hedging
against obsolescence
Operating
Lease provides
Convenience of use
Long
Advantages to Lessor
To Manufacturer Lessor
i)
ii)
iii)
iv)
Specialized services
General Advantages
i)
Collateral security
ii)
Tax planning
iii)
More profitable
iv)
v)
Lesser regulation
LEASE EVALUATION
By Lessee
Non-Quantitative
Subjective/ Strategic considerations
Quantitative
Analytical approach
Assess cash inflows with timing
Assess cash outflows with timing
Determine net cash flows with timing
Establish decision making rule
Apply capital budgeting techniques
Lease Evaluation by
Lessee
Lessees outflows:
1.
Lease rentals
2.
Initial deposit
3.
Lease Evaluation by
Lessee
Lessees inflows:
1.
2.
3.
Lease Evaluation by
Lessor
Lessors inflows:
1.
Lease rentals
2.
Initial deposit
3.
Salvage value
4.
Tax benefits
Lease Evaluation by
Lessor
Lessors outflows:
1.
2.
Financing costs
3.
Administrative expenses
4.
timing
Determine
timing
Evaluation
Akshay plans to acquire equipment, with a 5-year straight line
depreciation at a cost of Rs10 Lacs (delivery and installation
included). Akshay can borrow Rs10 Lacs at 10%, interest with
lump sum repayment after 5 years.
Alternatively, Akshay can lease the equipment for five years at a
rental charge of Rs2.60 Lacs per year, at the beginning of the
year. The equipment, when used, will have an estimated net
salvage value of Rs2 Lacs. If Akshay buys, it will own the
equipment at the end of five years. If Akshay leases, it will not
exercise the option to buy the equipment. The lease includes
maintenance service, whereas if bought, the equipment would
require maintenance provided by a service contract for Rs500,000
per year, at the end of the year.
Akshay 's tax rate is 35%. Evaluate lease or buy choice for Akshay.
Lease evaluation.xlsx
Advance payment
Security deposit interest/non-interest
bearing
Origination fee/ front end fee/ service
charges
Full payout/ non-full payout
Rentals advance, periodicity, renewal
option
Leveraged direct, syndicated, master,
import, cross borer, conditions of lenders
Lessors underlying costs
Lessors cost of lease
Lessors profit margin