The Advantages and Disadvantages of Debt Versus Leasing

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Bob Delph Professor Jones Finance 360 25 July 2013 The Advantages and Disadvantages of Debt Versus Leasing With Examples The primary focus of this report centers on the discussion of whether a particular company is better off using debt or leasing equipment for operations. The advantages of using debt to finance operations initially seemed like the best option. Leasing on the surface seems like a poor use of capital in business. Research indicated that there are advantages and disadvantages to both debt and leasing. Research also indicates that there are no standard answers to the question but that each firm will have to determine which avenue works bests in the given situation. Some advantages for leasing; a firm may lease in order to avoid obsolescence and other asset-specific risk (Wiley) Leasing works well in areas where technology is constantly changing. Maintaining the technical edge is possible through leasing as it allows a firm to capitalize on the most recent technology advances. Leasing contracts with maintenance and repair included allows a firm to avoid lease payments and additional maintenance costs. Leasing allows a firm to finance 100% of the cost spreading the cost out over the life of the lease. Equipment shipping and set-up can be included in the lease agreement. One example I would like to highlight is a school system in Michigan where the IT director wanted to purchase new computers for the school district but could not get the purchase approved in the budget because the local community would not fund a bond issue to purchase computer s every 3 to 5 years. After three years of not being able to get the bond passed the school board decided to try another method. They considered leasing as an option and found leasing more advantageous to the school district. Community voters were willing to support the proposal the IT

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