Fundamentals of Financial Management, Third Edition

16.3 LEASE VERSUS PURCHASE DECISION

The most important issue in lease financing is to evaluate whether it is preferable for a lessee firm to procure an asset for use through a leasing arrangement, rather, than to purchase it (of course, with borrowed capital). In other words, an evaluation of the economic desirability of leasing from the lessee’s viewpoint is significant. Whenever a firm decides in favour of a leasing arrangement, the investment decision and financing decision both are simultaneously involved. Thus a correct approach to lease analysis should be based on the interaction between these two decisions. The idea is that one should opt for either of the two alternatives — leasing on the one hand and buying on the other — on the basis ...