Why Lease - FAQ's
We have plenty of cash, bond proceeds or availability on our
bank facility, why would we lease?
Leasing is not the answer for everyone. However, ask
yourself the following questions:
- What is the cost of raising equity, bond money or generating
cash from operations?
- Does your organization want to tap the bank facility - the
lifeline to business operations?
- Does your organization desire to invest cash or equity into a
depreciating asset?
- Does paying cash prevent the implementation of an IT refresh
strategy?
- Does paying cash burden your organization with disposal
liability?
- Does paying cash result in unanticipated & expensive
future maintenance costs?
- What is the opportunity cost of not investing cash or equity in
higher ROI alternatives?
How can leasing benefit the hospital or group practice?
- Reduces total cost of ownership
- Outsources residual risk to the lessor
- Allows flexibility to upgrade to newer, higher performing
equipment
- Matches revenue to lease payments over the life of the
lease
- Avoids expensive maintenance costs in future years of equipment
lifecycle
- Creates a predictable IT equipment leasing budget
- Conserves working capital, cash & other liquidity
sources
- Transfers disposal liability & data wiping to the
lessor
- Lease payments can be 100% tax deductible over life of
lease
- Provides access to on-line asset tracking systems
- Leases can be classified as off balance sheet debt
What are some critical Leasing Best Practices?
- Collaborate on the leasing strategy with a trusted lessor in
advance
- Ensure the lessor understands HIPAA & the new data
protection sub title
- Identify the pro's & con's of leasing with a captive vs.
independent lessor
- Partner with a lessor that owns the process from asset
acquisition to disposition
- Verify the lessor has legitimate equipment remarketing
channels
- Understand the lease contract. Identify onerous terms in
the Master Lease
- Demand flexibility to manage assets on a line item basis at the
end of lease
- Require an on-line asset tracking system delivered with no
additional costs
- Avoid litigious lessors! Identify if current or former lawsuits
exist vs. their clients
Is there a simple lease vs. purchase formula that is easy to
measure?
- Identify the Weighted Cost of Capital for the organization
(WACC)
- Calculate the present value of the lease payments discounted at
the WACC
- Calculate the present value of end of term behavior (EOTB) at
the WACC
- Compare the present value costs vs. today's cash or bank
finance costs
- If the PV of the lease is less than purchase, leasing may have
merit
- Example
- Equipment Cost = $1 million
- Initial Lease Term = 36 months
- Monthly Rent = $27,950.00
- Weighted Cost of Capital = 10%
- EOTB is additional 2 months to organize, collect & return
equipment
- PV = of $27,950 @ 10% for 38 months =$914,715
- Purchase cost is 1,000,000.00 before interest costs
- Lease is more favorable than purchase by $85,285 as IT executes
the strategy
Why use weighted cost of capital (WACC) in the lease vs.
purchase analysis?
- WACC is a meaningful threshold for organizational cost of
capital.
- WACC includes the cost of generating cash from operations
- WACC includes the cost of public & private equity
- WACC is a more meaningful ROI threshold for capital
allocation
