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Analyzing Lease Vs. Buy Decisions Essay

1302 words - 6 pages

This simulation is designed to enhance our knowledge on the decision-making aspects of evaluating lease versus buy options. Bonnesante Research will show decision-making options for leasing or buying a computer and for acquiring a spectrometer. In addition, the company has plans to upgrade its manufacturing capacity. Throughout the decision-making process, we should be able to analyze the lease versus buy option with the given details and become more knowledgeable of the process and the options that are best for the company.In the first scenario, Bonnesante Research needed to have an accessible computer to run its Food and Drug Administration department. This would allow the company to have ...view middle of the document...

After a careful review of the options, I decided that Bonnesante Research would fair better by doing a capital lease for the manufacturing company. Once I reviewed the capital lease value versus the buying price of the plant, I felt it would be a better direction for the company due to the required building upgrades. The upgrades could always be negotiated into the contract. In addition, the annual payment for a capital lease was a better benefit for the company.I reviewed the different scenarios and provided some insight on what direction Bonnesante Research should go for the betterment of their business. Now, I will summarize the different capital budgeting concepts. We know that risk comes with anything that we do. “Leasing transfers the risk of obsolescence to the lessor while allowing the lessee to benefit from the use of the technology at a predefined cost. With a wide variety of vendors, configurations, and lease expirations, a typical lessor’s technology risk is spread across a broad spectrum of clients” (Roch, 2005). The person who is leasing the equipment will benefit more than the lessor, because he or she has a lower loss rate and a huge capacity of efficient sources. Another risk consumers take when they are not in tune with new hardware and software technology is the loss of business and employee efficiency as compared with other, competing organizations.Overall, most capital budgeting projects involve numerous variables and decision-making outcomes. For starters, “You have to estimate the cash flows associated with a project involves working capital requirements, project risk, tax considerations, expected rates of inflation, and disposal values” (Evans, 2006, p. 3).Now that we see how the risk factors affect our lease versus buy options and how the capital budgeting options work together, we need to look a little more into the present value of outflows, which would involve a lease versus buy decision. “The first criterion we will use to evaluate capital projects is Net Present Value. Net Present Value (NPV) is the total net present value of the project. It represents the total value added or subtracted from the organization if we invest in this project” (Evans, 2006, p. 11). For example, if Bonnesante Research’s present value is positive, it is given the go-ahead to proceed with the leasing on its new investment to expand the company. If not, the investment will be put on hold. This is the advantage you get from computing the present value; it gives you a go-ahead in your decision-making.Therefore, once you see which direction to go in your investment, you can determine if the capital lease, which is usually done in the form of purchasing or...

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