Reference no: EM132239886

Assignment

In order to determine which lease would produce the lowest risk, we must first breakdown what each lease is and how it applies to companies. Operating Leases or service leases "provide for both financing and maintenance" (Brigham & Ehrhardt) of leased equipment.

Often times, the contract is written for a period much shorter than the expected life of leased equipment and the lease also contains a cancelation clause.

Whereas capital leases or financial leases "cover the entire expected life of the equipment; does not provide for maintenance service, is not cancelable, and is fully amortized" (Brigham & Ehrhardt). Some of the advantages of an operating leases are bargain pricing and keeping costs lower.

Bargain pricing allows for a company to purchase the equipment at a discounted price after the operation lease expires, therefore it lowers the overall price of the equipment of they choose to keep it.

Operational leases also keep costs low because the company doesn't need to keep the equipment after they are done, they can just exchange it for a newer model. For capital leases there is no bargain pricing clause but they are eligible for tax-saving depreciation allowances for that equipment.

All in all it would definitely depend on what purpose and equipment the company would need that would determine which lease to go with. However, just by the short research I did on this topic I would say that the operating leases would have the least risk because if the company wasn't happy with the equipment or they ran it into the ground using it, they could just get a new one with a new lease.

References:

Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice [with MindTap] (15th ed.). Mason, OH

Murray, J. (27 Aug 18) Difference Between a Capital Lease and an Operating Lease.