Question content area top

Part $1$

Is it advantageous to the lessee that the lessor bears the risk of the asset becoming$$ obsolete? Explain.

Question content area bottom

Part $1$

A$.$

A lease agreement which contains an arrangement for the asset to be replaced upon$$ obsolescence, has to contain a clause whereby a down payment must be made by the lessee. This partially protects the lessor from the obsolescence risk. This is a disadvantage because an advantage of leasing is$100\%$ financing of an asset.

B$.$

If the lease is arranged so that the asset is replaced upon$$ obsolescence, the lease payments are usually much more expensive than in a lease where no upgrade is included. This is a disadvantage to the lessee because the replacement agreement can make the asset unattainable due to cost$.$

C$.$

It is not advantageous that the lessor bears the risk of the asset becoming obsolete because the lessee loses out on the opportunity to sell the asset and recoup some of the$$ asset's cost.

D$.$

An advantage of a lease to a lessee is that the lessor bears the risk of the asset becoming obsolete. A lease allows the lessee company to acquire or upgrade to the latest technology and maintain its competitive advantage.