The
Lease vs. Purchase cost comparison assumes the purchase
of equipment as an investment. Therefore, the basic
question is if the rental and other costs that are
saved by investing in (purchasing) the equipment will
provide an adequate return on investment.
The following term definitions may be helpful
when conducting a Lease vs. Purchase Analysis.
Amortization
:
Evenly spreading
equipment acquisition costs over the period of useful
life or the period of payment.
Break-Even
Point :
The point during
a lease when the cumulative leasing costs to date
equal the purchase price.
Purchase
Option :
The legal right to
buy something during a defined period at a defined
price.
Rental
Payments :
Periodic payments,
such as monthly, for the right to use leased equipment.
Salvage
Value :
The selling price,
less removal, transfer, storage, and re-marketing
cost or disposal costs, of your used equipment.
Useful
Life :
The length of time
that the equipment will serve program needs before
it wears out or the program need for the equipment
ends, whichever occurs first.
Consider the following items when making your Lease
vs. Purchase analysis:
Maintenance
Costs :
Is
the cost of keeping the equipment in good working
condition the same for each alternative?
Purchase
Options :
If
the lease gives an option to buy the equipment,
how will using this option affect the total cost?
Also, when is it least costly to use the purchase
option, and when will using the option cost more
than the cash purchase price?
Useful
Life of the Equipment :
There
are two ways to look at how long equipment will
be useful. One way is, how long will the equipment
be needed for the program it will support? The
second way is, how long will the equipment last
before it wears out? Check with the equipment supplier
to see if the equipment can last as long as needed.
Salvage
Value :
When
the equipment will last longer than the need for
it, include an estimate of the equipment's salvage
value in your cost analysis.
Other
Items :
The
selling price, less removal, transfer, storage,
and re-marketing cost or disposal costs, of your
used equipment.
Useful
Life :
Be
sure to consider other items that are unique to
the proposal when making the lease/purchase analysis.
If
the Lease vs. Purchase analysis indicates that purchasing
is more desirable, the best alternative for the agency
may still be to utilize a finance lease or a lease
with an option to buy if any of the following conditions
exist:
Trying out the system for a while before
buying it.
The system's design is new and untried.
Decisions
are pending that might change how the system is defined.
Data
needed to complete the analysis is still uncertain.
