3. Introduction
• A contractual agreement between two
parties: the lessee and the lessor
• Types:
– Operating leases
– Financial leases
• Tax oriented leases
• Leveraged lease
• Sale and leaseback
4. Cash Flow from Leasing
• Three important cash flow differences
between leasing and buying
– Lessee must make a lease payments each year
(after tax)
– Cannot depreciate assets for tax purposes (no tax
shield)
– Does not have to spend a considerable money to
buy an assets
6. Example
• The International Boring Machine Corporation
(IBMC) makes a pipe-boring machine that can be
purchased for $10,000.
• Xomox has determined that it needs a new
machine and the IBMC model will save Xomox
$6,000 per year in reduced electricity bills for the
next five years.
• These savings are known with certainty because
Xomox has a long-term electricity purchase
agreement with State Electric Utilities, Inc.
7. • However, Friendly Leasing Corporation has
offered to lease the same pipe-boring
machine to Xomox for $2,500 per year for five
years. With the lease, Xomox would remain
responsible for maintenance, insurance, and
operating expenses
