A Case Study on Finance Leasing - Understanding the Benefits Through a Practical Example

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 Introduction: Finance leasing can be a strategic tool for businesses looking to acquire expensive equipment without the burden of large upfront costs. In this case study, we explore the benefits and considerations of finance leasing through a fictional example involving ABC Foods, a rapidly growing restaurant chain in India. While the data used is fictional, it clearly illustrates how finance leasing works in practice.

The Scenario: ABC Foods, expanding its operations across India, needed 100 commercial-grade freezers for its various outlets. The total cost of purchasing these freezers outright was ₹1,00,00,000 (₹1,00,000 per freezer). To avoid straining its cash flow, ABC Foods opted for a finance lease with XYZ Leasing Ltd., a leading leasing company.

The Lease Agreement:

  • Total Equipment Value: ₹1,00,00,000
  • Lease Term: 5 years (60 months)
  • Monthly Lease Payment: ₹2,00,000
  • Interest Rate: 8% per annum (fixed)
  • End-of-Lease Option: Purchase for ₹5,00,000 (₹5,000 per freezer)
  • Annual Maintenance Cost: ₹10,000 per freezer

ABC Foods’ Perspective: For ABC Foods, the decision to lease rather than buy outright was driven by several factors:

  • Cost Management: Leasing allowed the company to avoid a massive upfront payment, preserving capital for other critical business activities like marketing and opening new outlets.
  • Predictable Budgeting: The fixed monthly payment of ₹2,00,000 made financial planning easier, allowing ABC Foods to manage its expenses without financial surprises.
  • Tax Benefits: The lease payments were tax-deductible, providing immediate financial relief by reducing taxable income.
  • Operational Continuity: With an annual maintenance contract, ABC Foods ensured that all freezers were well-maintained, minimizing the risk of operational disruptions due to equipment failure.

Challenges: While leasing offered many benefits, ABC Foods had to consider the long-term costs. The total lease payments over five years amounted to ₹1,20,00,000, with an additional ₹50,00,000 for maintenance and ₹5,00,000 for the purchase option, bringing the total to ₹1,75,00,000. Although this was higher than the outright purchase price, the flexibility and operational advantages outweighed the additional cost.

XYZ Leasing Ltd.’s Perspective: From XYZ Leasing Ltd.’s viewpoint, the lease was an attractive deal for several reasons:

  • Steady Revenue Stream: The lease provided a reliable income of ₹2,00,000 per month, totaling ₹1,20,00,000 over the lease term.
  • Interest Income: The 8% fixed interest rate ensured a profitable return on the investment.
  • Risk Management: XYZ Leasing retained ownership of the freezers during the lease term, reducing risk. If ABC Foods defaulted, the equipment could be repossessed and re-leased or sold.
  • Maintenance Contract: The maintenance agreement ensured that the freezers were kept in good condition, preserving their value and reducing the risk of costly repairs or replacements.

Challenges: XYZ Leasing Ltd. had to consider the depreciation of the freezers over the lease term and the ongoing client relationship management to ensure timely payments and address any equipment issues. However, the maintenance contract and the fixed interest rate helped mitigate these risks.

Conclusion: At the end of the five-year lease term, ABC Foods decided to exercise the purchase option, acquiring the freezers for ₹5,00,000. This finance lease arrangement allowed ABC Foods to expand its operations without heavy upfront costs, while XYZ Leasing Ltd. benefited from a steady revenue stream and profitable interest income.

Final Thoughts: This case study highlights how finance leasing can be a win-win solution for both lessees and lessors. For businesses like ABC Foods, it offers financial flexibility and operational continuity, while for leasing companies like XYZ Leasing Ltd., it provides a reliable income and risk management. While the data in this example is fictional, it illustrates the practical considerations and benefits of finance leasing in a real-world context.

Disclaimer: The figures and scenarios presented in this case study are entirely fictional and intended for illustrative purposes only.

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