Buying an asset takes a large amount of cash at the start, while leasing takes a small amount each month. A cash-flow answer names the month-one effect first, then the total cost over the full period.
This lesson is part of finance decisions in an original case. The idea of a closing balance comes from interpreting cash-flow forecasts.
What are the two horizons?
Look at the choice twice, and keep the two answers apart. They often point in different directions.
- Month 1: how much cash leaves the business at the start?
- Whole term: how much is paid in total?
A business can do well on the second horizon and fail on the first, because running out of cash in month 1 is a failure that totals cannot rescue.
Worked example: an invented oven
Dapur Kek Nurul can buy an oven for RM18 000 or lease it for RM600 each month over 36 months. The owner has RM9 000 in savings.
Buy: month-1 cash out is RM18 000. Closing cash: 9 000 − 18 000 = −RM9 000, so the owner cannot buy without finance. Lease: month-1 cash out is RM600, so closing cash is 9 000 − 600 = RM8 400.
Now the second horizon. The lease total is 36 × RM600 = RM21 600, which is RM3 600 more than the RM18 000 purchase price.
| Choice | Month-1 cash | Cash after month 1 | Total over 36 months |
|---|---|---|---|
| Buy | RM18 000 | −RM9 000 | RM18 000 |
| Lease | RM600 | RM8 400 | RM21 600 |
The mistake of comparing totals only
The common slip is to write: “Buying is cheaper by RM3 600, so the owner should buy.” This ignores the question about cash.
The repair keeps both horizons: “Buying saves RM3 600 over 36 months, but it needs RM18 000 at once and leaves the bakery RM9 000 short in month 1. Leasing keeps RM8 400 in cash, so it suits a business with limited savings.”
Check yourself
Leasing a display counter costs RM150 each month for 24 months, while buying costs RM3 000. Find the month-1 cash difference and the total difference.
Answer
Month 1: buying needs RM3 000, leasing needs RM150, so leasing saves 3 000 − 150 = RM2 850 of cash at the start.
Total: leasing costs 24 × RM150 = RM3 600, which is 3 600 − 3 000 = RM600 more than buying. Leasing is cheaper for cash now, and dearer over two years.
What to study next
The next lesson tests a final recommendation against every limit in the case. Continue with checking a recommendation against the case constraints.
The cash, profit and transaction timeline shows the month-by-month effect of each choice. For a teacher to work through timing questions with you, see online one-to-one Business tuition.