Running head: ANALYZING LEASE VS. BUY DECISIONS
Analyzing Lease vs. Buy Decisions
Bonnesante Research is a start up business in Irvine, California focusing on biotech, and is based on 30 employees. As it grows, company’s asset acquisition needs to be focused. Bonnesante needs to submit its first drug to Food and Drug Administration within six months. In order to run advanced analytical software for the preparation of the drug, it needs to acquire mainframe computer. Now the decision needs to be taken to either lease or buy the mainframe computer.
It is best to lease the mainframe computer for 18 months instead of buying it. The reason being is that the loan options were proposing significantly higher outflows and the leasing option of 18 month with no money down proposed the lowest present value of the cash outflows of the duration. Since Bonnesante is not a profitable company, the expenses for buying an asset will not be tax deductible, and loaning option will also require to record the transaction and corresponding liability on the balance sheet. But through the lease option, an asset will not need to be reported on balance sheet. Moreover, the technology can be outdated in the future and there could be a need of upgrading it. Due to all those reasons, operating lease is the best option that a company has at this moment.
Another scenario is that the Bonnesante requires an advanced spectrometer for its Research and Development program and the cost of the spectrometer is $2,000,000 but Bonnesante is now operating as a profitable firm. The options are to do a short term operating lease, a long term capital lease or to buy the spectrometer. Since Bonnesante is running as a profitable company now, and the need of spectrometer is a ...