The chapter provides an introduction to leasing and describes the various types of leases and terms associated with leasing. Operating leases are short-term leases, often cancelable and entered into for reasons of convenience and non-financial reasons. Financial leases are leases that cover most of an asset's estimated economic life. These leases are non-cancelable by the lessee or cancelable only if the lessor is reimbursed for expected 1osses arising from forgone income. Financial leases are essentially considered as substitutes for buying the asset and financing the same by borrowing the money required. Leasing and borrowing can be seen as financing alternatives.

The focus of this chapter is the valuation of a financial lease and to determine whether, and to what extent, it tends to enhance the value of the firm. The decision rule that emerges is: a financial lease is superior to buying and borrowing if the financing provided by the lease exceeds the present value of the liability it creates. An equivalent approach is to discount all lease cash flows using the after-tax borrowing rate and consider the NPV of the leasing. Use leasing if the NPV is positive.