WEB–APPENDIX J

LEASE FINANCING

A lease is a contract over the term of which the owner of the property or equipment (the lessor) permits another entity (the lessee) to use it in exchange for a promise by the latter to make a series of payments. More equipment is financed today by equipment leases than by bank loans, private placements, or any other method of equipment financing. This is because management recognizes that earnings are derived from the use of an asset, not its ownership, and that leasing is simply an alternative financing method.

Given the importance of lease financing, we have devoted an appendix to this special financing arrangement. We compare leasing with financing the acquisition of equipment with borrowed funds. To appreciate the comparison, we begin by explaining the fundamentals of leasing. We then provide an analytical framework management can employ to compare equipment leasing to purchasing equipment with borrowed funds.