Myth: Leasing Prohibits Ownership
Traditionally, companies purchase assets, use those assets to generate revenue, depreciate those assets to recover their cost, and then dispose of them when they no longer can produce profitably. Company management must take into consideration two issues:
1. The Useful Life of the Asset Versus its Economic Life
2. Where the Value is Obtained – By Using the Asset or Owning it
- If the Asset’s Useful Life is Longer than its Economic Life (time it takes to depreciate the asset to a zero-book value) – In this case, it is probably advantageous to own the asset. If, however, the asset’s useful life is less than or equal to its economic life (technology for instance), management must consider the answer to the second question. Clearly, the profitable use derived from any equipment comes from using it, not necessarily owning it. Hence, leasing these assets make more business sense.
- If Ownership of an Asset is Critical to an Organization – Leasing can still be used as a vehicle to accomplish this goal. Financial (or capital) leases provide a means for 100% financing for an asset with title transfers from the lessor to the lessee at the end of the lease term. Operating leases can be structured with purchase options at the end of the lease term allowing the lessee an alternative for ownership.