The Leasing Procedure ensures leasing and buying decisions are made after considering and comparing options of ownership, especially in calculating total equipment costs, tax benefits, and economic life. The procedure involves making lease options based on the overall good of the company, and in alignment with the overall financial strategies and objectives. The procedure applies to the Finance Department and any department requesting capital equipment. (8 pages, 1402 words)
The general guide for making lease/buy decisions should be the total cost and return on investment over the life of the equipment. Occasionally, however, situational factors and concerns may override the total cost result. In these cases, the overriding factors should be clearly documented and explained. Particular factors of the lease agreement determine if the lease is considered an “operating lease” and a monthly expense or a “capital lease” and treated as a purchase (i.e., the cost is amortized over an appropriate period).
The CFO (Chief Financial Officer) is responsible for reviewing lease/buy considerations for capital equipment.
Department Managers are responsible evaluating lease/buy decisions that affect their department.
Present Value Interest Factor (PVIF) – Serves to discount future values to account for the opportunity cost of time.
Operating Lease – Lease that, for operational purposes, is treated as a monthly expense.
Capital Lease – A lease that for operational purposes is treated like an asset purchase.
Lease-Buy Evaluation – Considering all factors in comparing the total cost of leasing and the total cost of ownership in order to make a lease or buy decision.
Total Cost – The cost of leasing or buying equipment, including monthly payments, interest/fees, taxes, operations/ maintenance, royalties, down payments, etc.