LEASING, BUYING, AND THE COST OF CAPITAL SERVICES

Publisher Summary This chapter discusses the concept of leasing, buying, and the cost of capital services. The contrast between the economist's and the accountant's approach to the problems of corporate decision making is nowhere better illustrated than in the lease-or-buy decision. A neoclassical economist would take it for granted that the rental terms offered by lessors would reflect the inescapable financial costs of owning durable capital goods—interest and depreciation. The choice between renting and buying for any firm depends on which method of acquiring the services of capital goods had the lower nonfinancial costs in the sense of the costs of acquisition, maintenance, and disposal. There are some reason to believe that the balance of these nonfinancial costs tend to favor leasing by user firms. In the chapter, the discussions are focused on such issues as: (1) the nature of the risks of leasing versus those of ownership, (2) the appropriate risk and tax adjustments to apply to the rates used to discount the various relevant cash flows, and (3) the assumptions about financing that should be made to avoid biasing the decision in one direction or the other.