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In your own words, please explain the importance of strategic planning. Also, explain when and why on organization should elect to own or to lease a piece of equipment. Use evidence and examples to support your claims. Healthcare finance course (owning vs. leasing equipment and strategic planning.

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Sixta Kovacek
Sixta KovacekLv2
28 Sep 2019
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Can someone please explain to me In your own words, the importance of your understanding of business loans and financing costs and investment terms. Use evidence and examples to support your claims.

Here are a couple of points for you to think about that I picked up doing some research on leasing vs. loans:

1 - Banks prefer leasing companies to finance equipment so they can finance the leasing companies. That way banks get the leasing company's expertise, selling power, processing capability and recourse guarantees. They prefer to buy paper in blocks of in millions instead of thousands. Therefore, banks do not make it easy or attractive for individuals or companies to get individual equipment loans.

2 - Common sense is: If it appreciates, buy it. - If it depreciates, lease it.

What are your thoughts? Agree or disagree? Why?

Bandbox is considering a lease vs. buy decision on a large piece of equipment. The equipment will be obsolete after 3-years (no value at end of life). The company can borrow the funds needed to purchase this equipment at a rate of 10%. The company has a tax rate of 40%. If the company buys the equipment, it will be able to reduce its taxes by $640 million due to depreciation tax savings (interest deductions and a reduction in income due to maintenance also providing tax savings). All together, owning the equipment results in a positive contribution(due to all tax savings) of $208 per year in the first two years. In the third year, cash flow would be negative due to the repayment of the loan. As such, ownership cash flows are estimated to be as follows:

Year1: +208

Year2: +208

Year3: -4,592

Leasing provides fewer tax shields, but no debt. As such, it's cash flows should be the same every year and negative. The cash flows expected if Bandbox leases this equipment would be:

Year1: -1260

Year2: -1260

Year3: -1260

What is the after-tax cost of debt for Bandbox?

What is the NPV of the cash flows from ownership(Use after-tax cost of debt as interest rate)

What is the NPV of the cash flows from leasing?(use after-tax cost of debt as interest rate)

Based upon your answers in the prior 3 problems, should Bandbox buy or lease this equipment?

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