Sunday, October 4, 2009

Leasing as a source of financing

Leasing is considered a source of financing provided by the lessor to the lessee. The lessee receives the service of a certain fixed asset for a specified period of time, while in exchange for the use of this asset the lessee commits itself to a fixed periodic payment. The only other way the lessee could obtain the services of the given asset would be to purchase it outright, and the out right purchase of the asset would require financing. Again, fixed-most likely periodic-payments would be required. The lessee might have sufficient funds to purchase the asset outright without borrowing, but the funds used would not be free, since there is an opportunity cost associated with the use of cash. It is the fixed-payment obligation for a set period that forces us to view the financial lease as a source of long-term financing. Although at this point the rationale for leasing may seem no different than that for borrowing when a cash purchase cannot be made, certain other considerations with respect to the lease-purchase decision do exist.

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