Why Lease - FAQ's
We have plenty of cash 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 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
depreciating assets?
- 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?
What are some high level benefits of
leasing?
- Establishes a technology refresh strategy
- Conserves working capital, cash & bank line
- Reduces total cost of ownership
- Outsources equipment residual risk to the lessor
- Creates a predictable IT equipment budget
- Lease payments can be 100% tax deductible over life of
lease
- Allows flexibility to upgrade to newer, higher-performing
equipment
- Transfers disposal liability & hard drive sanitization to
the lessor
- Provides access to on-line asset tracking systems
- Avoids expensive maintenance costs in future years of equipment
lifecycle
- 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
- Establish Master Lease terms that allow execution of an IT
refresh strategy
- Partner with a lessor that owns the process from asset
acquisition to disposition
- Verify the lessor has legitimate equipment remarketing channels
for off lease equipment
- Understand the financial terms of the lease contract. Interim
rent & missed notice penalties
- 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 any 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 the 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 and private equity
- WACC is a more meaningful ROI
threshold for capital allocation
