Leasing

According to schwer, ROE for capital lease is lower. However, i don’t think it is lower than operating lease all the time… at early year: Capital lease is higher later year: capital lease is lower this is because it is affected by NI Am i right?

If I recall correctly, capital leases will have both depreciation expese and interest expense. Operating leases have a lease expense (essentially an operating expense). I would argue that it would depend on the term/rate of the capital lease, the depreciable life/method of depreciation, and amount of the periodic payment for the operating lease. It could fall either way. Take my info w/ a grain of salt though. I haven’t looked at FSA in over a year.

You’re right, keanhu - ROE is lower for capital lease (relative to operating lease) in the EARLY years & is higher for the LATER years. Capital lease payment consists of depreciation expense & interest expense, while operating lease consists of only a lease payment (charged to operating [eg. rental] expense). In the EARLY years, the deprecn expense plus interest expense for capital lease EXCEEDS the lease payment of the operating lease. In the LATER years, the depn exp plus int exp is LOWER than the lease pmt (bc int exp decreases due to decreasing liability). Therefore NI in early years of cap lease will be lower than op lease & in the later years it’ll be higher.