Lease now or buy later ???

Assistance with the question on how to acquire needed equipment.

For those of you who are dealing with tight equipment acquisition budgets, and are trying to determine your options, we have prepared several comparative examples to illustrate the economics of holding off purchases for later years, versus purchasing now using a lease purchase financing.

Equipment acquisition options and lease purchase financing.

When you have a need to replace equipment over a period of a few years, does it make sense to buy now and finance new equipment with today's low interest rates,

Or

Hold off until funds can be saved, and then pay for cash later (but at a higher equipment price taking into consideration the effect of annual price inflation).

The question is then what is the most economical means of completing your equipment acquisition or replacement over a relatively short period of years.

Shown below are examples which present alternative lease purchase and cash purchase timing scenarios, which you may find helpful in determining your options and in making your own budget decisions.

Based on the results shown in the examples, it appears the following generalities would apply:

1.) As the differential between anticipated annual equipment price inflation and current low tax exempt interest rates increases, the advantage of purchasing and financing now at today's equipment prices also increases, as opposed to waiting to accumulate reserves to be used for the purchases.

2.) The closer interest rates and the rate of inflation are to each other, the advantage of buying now with financing is diminished, and it may in fact disappear.

This of course, assumes budget cash flows are available to generate the needed cash purchase funds in a relatively short time frame.

3.) When an equipment purchase or replacement program of perhaps 5 years is considered, and the anticipated inflation rate exceeds comparable term borrowing rates, buying now and financing is considerably less expensive than delaying the purchase of equipment over that long period of time.

As the time period for delayed purchases is extended, the greater the "buy now" advantage becomes.

4.) The "buy now" decision is also impacted by costs of maintaining old undependable equipment as opposed to new, and estimates of that potential maintenance expense differential are not included in the examples presented below. However when preparing your own comparisons you would be able to incorporate those cost differentials to present a total picture relationship based on individual circumstances.

5.) Everyone's situation is different, but basically the question will boil down to the ability of your budget to support anticipated lease payments, or the necessary annual reserve fund replenishments, to allow you to purchase new equipment.

Saving money by buying now and financing of course won't work if you dont have the cash flow to make the lease payments. However, in most cases governing bodies do have discretion, and saving money with reduced equipment costs and maintenance expenses is always popular. As you will note, the examples shown below illustrate today's current market where anticipated inflation rates for heavy equipment can be expected to exceed rates available in the current tax exempt interest rate market.

The assumptions for each example are shown, as are the respective inflation and interest rates, both for the lease financing, and for the investment of anticipated annual savings.

As you can see, in one example it is better to purchase for cash than finance, but of course that assumes cash flow is available to follow that cash purchase option.

We would be pleased to hear from you as to your own analysis of this question, and how your figures may compare given the limited nature of our presentation.

As a courtesy, we will perform a limited number of individually tailored calculations for our customers and potential customers, if requested and as time permits, using a format similar to that shown in the examples.

You can contact us at info@fmlc.com

EXAMPLE A

EXAMPLE B

EXAMPLE C