medium · Principles of Finance capital-budgeting
An analyst is comparing two firms. Firm A leases its equipment (Operating Leases), while Firm B buys its equipment (CapEx).
Which firm will likely have a higher 'Cash Flow from Operations' (CFO), and why?
- Firm A, since leasing conserves upfront cash and therefore raises its reported operating cash flow.
- Firm B, because CapEx is reported in Investing Activities while Lease Payments reduce CFO.
- Both firms end up identical since Free Cash Flow doesn't depend on the lease-versus-buy choice.
- Firm B, simply because depreciation is always a larger non-cash add-back than lease expense.
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