Why Is Leasing Profitable for Both the Lessor and Lessee? The symmetry between the lessee ' s problem and the lessor ' s problem suggests that if the lessee wants to lease, it will not be profi table for the lessor to purchase the asset in order to lease it out. In some cases, however, it may be that the differences in tax rates between the lessee and the lessor make it profi table for both to enter into a leasing arrangement. Here is an example: Greenville Electric Corp. is a public utility which pays no taxes. Its credit rating is of the highest order, since all of Greenville ' s debts are guaranteed by the city of Greenville. Greenville Electric has decided that it requires a new turbine. The turbine costs $10,000,000 and will be depreciated to zero salvage value over 5 years. Greenville Electric borrows at 6%. Greenville can either lease or buy the plant. The lease offer it has is $1,800,000 per year for 6 years (starting today); the lessee is a captive leasing subsidiary of United Turbine Corp., the manufacturer of the turbine. United Turbine Leasing also borrows at 6% and has a tax rate.

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Leasing can be profitable for both the lessor and lessee for several reasons Capital Conservation Le... View the full answer