Concept of Leasing
- From the standpoint of finance, assets are acquired to generate cashflow. Finance executives or managers understand that the cash flows are generated by use of assets and not by owning them (the assets). Almost any asset that can be bought (sold) can also be taken (given) on lease. For example, a firm having a factory 20 km away from Nagpur city requires a couple of buses for transportation of staff from city to the factory site. The firm can either purchase the buses by using its own fund (equity financing) or by taking loan from bank (debt financing) or partly by own fund and partly by loan (equity and loan financing). Alternatively, the firm can take the buses on lease.
- Therefore, lease is nothing but an alternative financing arrangement. More specifically, lease is a financing decision. First, a firm has to make an investment decision in an asset that will generate cash flow. After that the finance manager has to decide whether the asset is to be bought by using internal fund or borrowing or by both or by taking the asset on lease.
No comments:
Post a Comment