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LEASE

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  1. LEASE • A LEASE REPRESENTS AN AGREEMENT THAT GIVES CONTROL OVER ASSETS OWNED BY THE LESSOR TO THE LESSEE FOR A SPECIFIC PERIOD OF TIME UPON THE PAYMENT OF AN AGREED-UPON PAYMENT, RENT.

  2. TYPES OF LEASES • IN NON-REAL ESTATE LEASING THERE ARE SEVERAL TYPES OF LEASES: • OPERATING LEASE • CAPITAL (OR FINANCIAL) LEASE • CUSTOM HIRE

  3. OPERATING LEASE • USUALLY A SHORT-TERM RENTAL ARRANGEMENT IN WHICH THE RENTALCHARGE IS CALCULATED ON A TIME BASIS. • SUCH AS THE HOUR OR THE DAY, ETC. • THE LESSEE PAYS THE DIRECT COST SUCH AS FUEL AND LABOR.

  4. CAPITAL OR FINANCIAL LEASE • A LONG - TERM CONTRACTUAL ARRANGEMENT IN WHICH THE LESSEE ACQUIRES CONTROL OF AN ASSET IN RETURN FOR RENTAL PAYMENTS. • USUALLY RUNS FOR SEVEAL YEARS AND CANNOT BE CANCELLED WITHOUT PENALTY.

  5. IS FULLY AMORTIZED, MEANING THAT THE PRESENT VALUE OF THE LEASE PAYMENTS EQUALS THE FULL PRICE OF THE LEASED EQUIPMENT. • MAY HAVE A PRUCHASE OPTION AT THE END OF THE LEASE.

  6. CAPITAL VS. OPERATING LEASE • CAPITAL LEASE TRANSFERS SOME OF THE RISKS OF OWNERSHIP TO THE LESSEE. • MEETS AT LEAST ONE OF THE FOLLOWING REQUIREMENTS: • (1) OWNERSHIP TRANSFERS TO THE LESSEE BY THE END OF THE LEASE TERM

  7. 2) LESSEE HAS AN OPTION TO PURCHASE THE PROPERTY AT A BARGAIN PRICE. • 3) THE LEASE TERM IS FOR 75% OR MORE OF THE REMAINING USEFUL LIFE OF THE ASSET. • 4) THE PRESENT VALUE OF THE LEASE PAYMENTS IS EQUAL TO OR MORE THAN THE FAIR MARKET VALUE OF THE PROPERTY

  8. ISSUES IN CAPITAL LEASING • ADVANTAGES: • CONSERVATION OF WORKING CAPITAL • NEARLY 100% FINANCING • THE USE OF MODERN EQUIPMENT • POSSIBLE TAX BENEFITS

  9. EVALUATION OF A LEASE VS. PURCHASE • MAY BE EVALUATED BY LOOKING AT THE PRESENT VALUE OF CASH FLOWS FOR EACH OPTION.

  10. PROBLEM • $ 30,000 TRUCK • 35% TAX BRACKET • 12% COST OF CAPITAL • PRUCHASE • 30% DOWN PAYMENT • LEVEL PAYMENTS • 10% INTEREST • 5 YEARS • LEASE • 5 YEAR LEASE • ANNUAL PAYMENTS OF $7,000