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Assignment#2

Capital Budgeting – (Lease-Versus-Buy)
Sunita Goel

PMAN 650, Section 9040
Professor: Dr Krishna Challa
UMUC

Contents
INTRODCUTION4
WHAT IS CAPITAL BUDGETING4
SITUATION ANALYSIS5
LEASE TYPES5
APPLICATION6
RISK IN “LEASE-VERSUS-BUY” OPTIONS8
ADVANTAGES OF COMPUTING PRESENT VALUE:9
CIRCUMTANCES IN WHICH CAPITAL LEASE IS BETTER ALTERNATIVE:9
QUALITATIVE FACTORS IMPACTS ON FINAL LEASE OR BUY DECISION:9
WHY LEASE?10
Conservation of Capital10
Payment Flexibility10
Operational Flexibility11
Upgrade Flexibility11
Changing Requirement11
Residual value Risk11
Challenges of Leasing11
WHY PURCHASE?12
Useful Life Considerations12
Easier to Purchase12
Past Leasing Experience12
SUMMARY13
REFERENCES14

INTRODCUTION
To buy or not to buy is the question for many companies acquiring assets for their business. Equipment and other assets are extremely important when a company is trying to get off the ground in a new business or implementing a new project. The chief executive officer would have to ask how would we finance the equipment needed, pay back investors, and make the company profitable for all. Lease-purchase decisions are one of the commonly confronting decisions a firm makes when considering new capital projects. It is a capital budgeting decision that forces a company to compare leasing and purchasing alternatives. WHAT IS CAPITAL BUDGETING

Capital budgeting is the process of making long term investment decisions that furthers company’s goals. Duty of financial managers includes choosing investments with satisfactory cash flows and rats of returns. The financial manager must be able to choose between alternatives, using procedures to evaluate, compare, and select option which maximizes organizations market value of the firm (PMBOK, 2009, pp. 168). This procedure of analyzing is called capital budgeting. Capital budgeting analysis takes into consideration payback period, discounted cash flow, net present value, internal rate of return, tax benefits, salvage values, cash flow analysis, debt reduction, equity-build up, etc. (Kerzner, 2009, pp.614). In today’s environment of historically low interest rates, is leasing still a viable alternative to the outright purchase of information technology (IT) assets? In many situations, technology leasing offers greater operational, strategic, and financial benefits than outright ownership. Leasing makes it possible for companies to acquire up-to-date equipment while preserving cash and credit lines for more strategic business uses such as facilities expansion, increased research and development, sales force expansion, or receivables financing. Leasing has a lower impact on budgets than purchasing and therefore provides companies with the opportunity to realize operational savings and productivity improvements in a timelier manner. Finally, leasing provides a hedge against obsolescence, facilitates upgrading, and assists in the disposal of old equipment. SITUATION ANALYSIS

This paper will present the “lease-versus-buy” analysis using a pseudo pharmaceutical company. Continuous improvements in all areas of technology are providing IT managers with numerous opportunities to reduce corporate operating costs and increase productivity. Additionally, increased business activity from a revitalized world economy requires greater capacity and performance as well as new technology investments. This situation, combined with a highly competitive business environment, requires organizations to continually investigate the operating and productivity benefits available with the latest advances across the entire spectrum of technology application software, servers, storage, networks, and desktops. All businesses prefer to spend their capital on investments that will provide a directly measurable return, such as new product development or a new, more efficient distribution center. IT may be seen as a...
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