Reference no: EM133130604

Let's consider a firm ABC which operates in manufacturing auto parts, which are eventually supplied to the global automakers. To expand its business, our manufacturing firm needs more press machines. Let's say the market price of each machine is $ 5,000,000, and the firm needs at least 2 such machines for its two production plants. The management does not want to invest significant capital until they are sure of the demand. In such a scenario, they can decide to lease the press machine for $ 5,000 a month. Hence the effective expense would be $ 10,000 per month for the firm ( taking both machines into account).

Such a mechanism will help the firm in fulfilling its strategic initiatives of expanding the manufacturing capacity at a much less amount without taking any business risk. What it has lost out to is the ownership rights, which at this moment of time is not the biggest issue that management is concerned about.

Once the firm has tested waters and is confident of the available demand, they can go ahead and purchase the machines from the market.