The van that will not start: It is twenty to five at the Mill Lane bakehouse. The oldest of the bakery's vans will not start again, and the bread for the Park Road shop has to leave at five.
Lena and Marco agree it must be replaced. The dealer offers them two ways to get the new van.
Buy it
- Pay $36,000 when it is delivered
Pay to use it
- Pay $750 a month for four years
- Servicing included
- Hand the van back at the end
The first way is buying the van outright (purchasing). The bakery pays the whole price, and from that day the van belongs to Lena's Bakery Ltd. It can drive it for as long as it runs, and sell it when it is finished with it.
The second way is leasing, which you met in 3.2.2 as one of the external sources of finance. The bakery pays a leasing company (the lessor) a regular amount to use the van for an agreed period. The leasing company still owns the van, and at the end of the period the bakery gives it back.
Buying the van outright
- Who owns it: Lena's Bakery Ltd, from the day it is paid for
- What it costs: $36,000 in one go, on delivery
- Repairs and servicing: the bakery pays for them
- At the end: the bakery keeps it, or sells it and keeps the money
Leasing the van
- Who owns it: the leasing company, all the way through
- What it costs: $750 a month for four years
- Repairs and servicing: included in this lease
- At the end: the van goes back, and the bakery can lease a newer one
Why is leasing a source of finance? Because it gets the bakery a $36,000 van without finding $36,000. Someone else pays for the asset, and the bakery pays them back, a little each month, for the right to use it.
The one difference: Buying: pay once, and the asset is yours.
Leasing: pay regularly, and the asset is never yours.
Every advantage and disadvantage in this micro grows out of that one difference.
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The dealer's two offers look like the same money: $36,000 to buy, and 48 payments of $750, which is also $36,000. They are not the same.
Where the difference lies
- When the money is paid.
- What the bakery has left at the end.
| Buy the van | Lease the van | |
|---|---|---|
| Paid on day one | $36,000 | $750, the first monthly payment |
| Paid over four years | $36,000 + servicing $1,000 × 4 = $40,000 | $750 × 48 months = $36,000, servicing included |
| Left at the end | A van the bakery can sell for about $12,000 | Nothing: the van goes back |
| Cost over four years | $40,000 − $12,000 = $28,000 | $36,000 |
Leasing is not the cheap option: Over the four years, leasing costs the bakery $8,000 more: $36,000 against $28,000. The leasing company's payments have to cover the van, its servicing and its own profit.
What leasing buys is time. The bakery pays in small amounts, out of the money the van helps it earn, instead of in one lump before the van has earned anything.
Now look at the bank account. At the end of 2025 Lena's Bakery Ltd had $25,000 in cash and an overdraft of $15,000. Buying the van outright would need $11,000 more than all the cash it has, and would leave nothing for the Valley Grain flour bill or Friday's wages.
A payment of $750 a month is less than a fifth of what the bakery takes in a single day (sales of $1,600,000 a year are about $4,380 a day).
Comparing the two, step by step
Add up what each option pays out
Use the same period for both. Buying: the price plus servicing, $40,000. Leasing: every payment, $750 × 48 = $36,000.
Take off what an owned asset is worth at the end
The bought van can be sold for about $12,000, so buying really costs $28,000. A leased van goes back, so there is nothing to take off.
Compare the totals
Leasing costs $8,000 more over four years. That answers one question: which is cheaper over time.
Then look at day one
Can the business pay the lump now, and what would it go without? With $25,000 in the bank, Lena's Bakery Ltd cannot pay $36,000 from cash at all.
Two numbers, two questions: The total over the years tells you which option is cheaper.
The cash on day one tells you which option is possible. A business can be right about the first and still run out of money because it ignored the second.
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Three things to pay for in one week: Three things need paying for in the same week. Neither buying nor leasing is always better: the answer depends on the asset and on the business.
The three things
- Priti tells Lena that one of the Mill Lane ovens is failing.
- Aisha, Kofi and Jonas ask for new card tills in their shops, because customers want to pay by phone.
- The van still has to be replaced.
Lena and Marco ask the same five questions about each asset.
| Question | New oven for Mill Lane | Card tills for three shops | New van |
|---|---|---|---|
| How long will we use it? | Every night for about fifteen years | Until a better model comes out, in two or three years | Four years of early starts, then it is worn |
| Will it go out of date? | Hardly: it bakes the same loaf for years | Quickly: payment technology keeps changing | Slowly, but it wears out |
| Can we pay for it now? | $45,000 against $25,000 in the bank: not from cash | $9,000: yes, but it takes more than a third of the cash | $36,000: not from cash |
| Who fixes it? | Priti's team knows ovens; servicing about $1,500 a year | The leasing company swaps a broken till the next day | Servicing is included in the lease |
| What is left at the end? | An oven with years of baking left | Old tills nobody wants | A van worth about $12,000 |
| Decision | Buy | Lease | Lease, while cash is short |
Why buy the oven when the bakery cannot pay for it from cash? Because leasing it for its whole life would cost far more. At $1,100 a month, five years of leasing comes to $66,000, more than the $45,000 price plus $7,500 of servicing, and a bought oven would still have ten years of baking left.
A need that lasts fifteen years is a long-term need, so it suits a long-term source such as a bank loan (3.2.3). The tills are the opposite: bought today, they would be out of date before they wore out.
Buying suits the business when
- The asset will be used for most of a long life, like the oven
- It will not go out of date quickly
- The business has the cash, or can borrow long-term at a fair cost
- It can repair the asset itself, and wants to sell it or borrow against it later
Leasing suits the business when
- Cash is short and a lump now would leave bills unpaid
- The asset dates quickly and newer models keep coming, like the tills
- It is needed for a few years only
- The lessor's servicing and quick repairs are worth paying for
A third way: sell it and lease it back: A business that already owns something valuable can sell it and lease it straight back (sale and leaseback). If Lena's Bakery Ltd sold the Mill Lane bakehouse to a property investor and leased it back, it would get a large sum of cash at once and keep baking in the same building.
The cost of sale and leaseback
- Lease payments for years to come
- A building that is no longer the bakery's
- A buyer who may pay less than it is worth if the sale is rushed
How this comes up: Leasing is a source of finance, so it turns up whenever a case asks how to pay for a machine, a van or a building.
Where it comes up
- Explain one source of finance for the new machine, for two marks.
- Discuss two sources for a big purchase, for ten.
- Asked head-on: explain one advantage and one disadvantage for the business of leasing an asset rather than buying it, for four marks.
- In the ten-mark questions the decision is the point: which one, for this business, and why.
The four-mark pattern
- Name the advantage. Leasing avoids a large payment now, so cash is kept for running costs.
- Show it in the case. The bakery has $25,000 in the bank and the van costs $36,000; $750 a month can be paid out of daily sales.
- Name the disadvantage. Leasing costs more in total, and the business never owns the asset.
- Show it in the case. $36,000 over four years against $28,000 for buying, and a van worth $12,000 goes back to the leasing company.
The trap: calling leasing cheaper: Leasing is cheaper today and usually dearer in total. Write 'leasing is cheaper' and the advantage is wrong; write 'leasing needs no large payment now' and it is right.
The second trap: a general answer: 'It helps cash flow' could be about any business. Use a figure from the case: the price, the monthly payment, the cash in the bank.
Explain one advantage and one disadvantage for Lena's Bakery Ltd of leasing the new van rather than buying it.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.