Lease Versus Purchase Analysis with Lotus Spreadsheet

Date of Submission

1990

Document Type

Thesis

Degree Name

Master of Science in Accounting

Department

Accounting

Advisor

Michael Rolleri

LCSH

Lotus 1-2-3 (Computer file), Lease or buy decisions--Econometric models, Industrial equipment leases--Accounting--Econometric models, Industrial procurement--Accounting--Econometric models

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1990 no. 1

Abstract

Over the past decades, more and more firms have chosen leasing as a major method to acquire an asset rather than purchasing by cash, selling stocks, or debt financing. During the same period, the difficulty in resolving lease-versus-purchase analysis has been broadly discussed or even debated among academic literature and practitioners. Some of the discussion has developed into a portion of modern financial theory.

The analysis of lease-versus-purchase has always been a difficult problem for accountants or financial analysts, because too many facts will affect the present value of each alternative. For instance, the tax regulations, the duration of the lease, the residual value of the asset, the rate of obsolescence, inflation, and technological environment variation all must be included in the consideration. The major concern is those facts are uncertain. Many decision-makers have to estimate the risk level of each fact by their own subjective judgment.

As the lease-versus-purchase analysis becomes more sophisticated, the personal computer is getting popular in business applications. Some related spreadsheet analysis software packages also have become a powerful tool to solve the most complicated considerations in the lease-versus-purchase analysis.

Before the computer spreadsheet software was introduced into the lease-versus-purchase analysis, consideration of all the variables was too complicated to handle. In order to simplify the problem, some difficult areas were usually skipped, assuming each to be a constant. Now that the personal computer is getting more popular in business application, many computer programs can easily deal with such a complicated analysis.

In addition, most of the computer programs can enrich a comprehensive analysis for the decision-makers. Many assumptions required before have become redundant under today's computerized approach. Now, the lease-versus-purchase analysis can be evaluated by computerized analysis under more flexible circumstances. For instance, the lease term can be different from the asset's economic life or even different from depreciation periods. The net present value also can be calculated by floating discount rates. Due to the fact that so many assumptions have become unnecessary now, the final conclusion will be more realistic and more reliable.

1.2 METHODOLOGY The method adopted in this paper is the net present value analysis approach. This method precisely reflects the time value of money (Harwood 87). As everybody knows, a dollar's purchasing power today is not equal to the purchasing power of a dollar previously. Especially, today's one dollar has more opportunity value to the entrepreneur than to the individual. Another more important reason is the net present value can be figured out with amazing speed and accuracy by the spreadsheet programs.

Leasing viewed as a capital budgeting decision is usually inappropriate. in general, lease payments not only contain operating and executory costs but also include financial interest expenses. This inclusiveness of financial expense is inconsistent with the traditional capital budgeting approach (Allen 18-20). Besides, many decision-makers actually view leasing as a financing alternative (O'Brien and Nunnally 33). Therefore, the "net advantage to lease” technique has been adopted as most economists did in their articles as the analysis method employed in this paper.

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