How to Set Up an Effective Equipment Lease vs Buy Analysis?
To decide the best way to fund equipment acquisitions, you need to perform a detailed lease versus buy analysis by comparing the cost to buy now against the future costs of leasing.
The most common approach to a lease vs buy analysis is to do a simple discounted cash flow analysis comparing the Net Present Value (NPV) of the potential lease payments to the upfront cost of paying cash for the equipment. Here are key best practices to follow to make the analysis more effective:
- Determination of Total All-in Cost. It is not enough to consider only regular term rents. A lease agreement contains many other costs, including retainable deposits, interim rent, extension / renewal rent, buyout costs, and potential penalties. Each of these elements of all-in cost must be considered in the analysis to get a true picture of which equipment sourcing solution is the best.
- Use of Valid Risk Assumptions. A critical component of accurate forecasting is to make accurate assessments of specific risks associated with the leasing of a particular piece of equipment, such as possible technical obsolescence, difficulty of return, potential for damage, and likelihood of elevated buy-out valuation. To get a useful lease vs buy analysis, you must be realistic about the risks you may face.
- Evaluation of Past Lease Performance to Determine True Lease Costs. To arrive at accurate projections of all-in costs for future contracts, first you need to perform a comprehensive analysis of active and expired leases. A thorough review of the entire equipment leasing portfolio often reveals that the all-in costs of leasing are greater than expected. With this knowledge, the lease vs. buy analysis not only becomes more precise, but you have support in negotiations for lower leasing costs.
- Selection of the Best-Value Vendors. Before a lease vs buy analysis is conducted, the lessor market should be diligently searched to select the vendor that offers the most value—which isn’t necessarily the lowest-rate vendor. It’s that vendor’s all-in, or “fully loaded,” cost that’s relevant.