A Practical Approach to the Lease Versus Purchase Problem

The lease versus purchase decision has intrigued and perplexed both the academician and the practitioner for many years. The enigmatic nature of this problem stems largely from the fact that lease‐purchase is a financial hybrid containing both financing and investment elements. The decision is unique in that the amount of financing provided by the lease alternative is not a matter of managerial discretion. Leasing commits the firm to what is, in effect, 100 per cent nonequity financing of the asset's acquisition. A purchase decision, on the other hand, allows the firm some flexibility in determining the optimal debt‐equity financing mix. This necessarily raises the question of how a firm should deal with the issue of financial risk differences between the alternatives.