XLS Lease vs Purchase vs Rental Analysis

Duane Griffith(406) 994-2580210 Linfield Hallgriffith@montana.eduMontana State UniversityBozeman, Mt. 59717Please read the cautions, assumptions and interpretations of results listedbelow before you run this program. It is very important that you understandhow to use this program before interpreting results.Cautions and Assumptions:1)This program is designed so that you can compare many differentpossible combinations of lease, purchasing and custom orrenting machinery to accomplish a particular task. However, youmust be careful that you are making relavent comparisons. Themistake that this program will not account for is an incorrect specification of the number of years for comparison purposes when evaluating a lease with a buyout option to a purchase. The number of years specified for analysis must be at least as long as the combined lease term and finance term for the buyout.Example: Lease for 5 years and finance for 5 years, termmust be at least 10 years long. 2)Year 0 in the analysis is counted as a full year for financial and economic considerations. This means that a 10 year analysiswill end in year 9 listed on the results tables for Purchases,Leases and Custom/Rental.3)If indicated the lease analysis has no buy out option, the program assumesthe work must be done, hence consecutive leases of equal costs are executedfor the full fifteen year analysis. This allows for comparisons with buyout options.4)If the buyout option is exercised, it occurs at the beginning of the year followingthe last year in the lease. The basis for depreciation is the buyout valueand the buyout value is depreciated for class life of the piece of equipmentspecified using the strait line method. Salvage value is calculated asa percent of the buyout amount, not purchase price. Full depreciation is takenduring the first year of the buyout.5)Annual expenses should include all cash expense (not depreciation) incurred by the leasee.Expenses before the buyout and after the buyout are sepreated to account forleases which may cover some of the variable costs associated with equipment operation.6)For rental analysis, include the annual cost of renting equipment and theannual cash operating expenses incurred by the renter. The program assumes thesecosts will inflate each year by the inflation factor specified in the input section.The rental analysis uses the same discount factors (tax adjusted) as the leaseportion of this template.7)The Rental Portion of this program can be used to compare getting thework done by a "Custom Operator." You can simply fill inthe custom rate charged and leave the operating expense blank.Remember to make fair comparisons. If you are looking at purchasing a combine, you must use only the custom ratefor the combine when making a comparison, not the rate of cutting and hauling.8)The discount factor specified in the input section is adjusted by the marginal taxrate specified. The assumption is that alterntive investments would generate a taximpact and therefore the discount rate should be adjusted for these implicationsfrom alternative investments.9)The results of the purchase option can be heavily influenced by the residual value calculated for the piece of equipment. Make sure that you check the residual value calculated and that you are using the numberof years for the analysis that you actually plan to keep the piece of equipment for the purchase option or the combination lease & buyoutoption. If you are likely to keep a piece of equipment 15 years, use 15 years, not a shorter period of time.Interpretation of Results:10)The results of the program are presented in three tables. Each option analyzed, 1) Purchase, 2) Lease, 3) Rental/Custom, has a table ofresults calculated for that option. In each table, detail is presentedfor the financial and economic implications of that option. Comparisons of the different options is accomplished using one of two possible outputsfrom this program. At the end of each of the three tables for each option aretwo columns. The first is labeled " Cummulative Net Present Value."The second is labeled "Annual Equivalent." 11)The Net Present Value is the total dollars spent (after taxes) in currentdollars. All future expenses and cash outflows are discounted back tothe present. This allows an apples to apples comparison of different amounts of money being spent purchase vs lease vs rental etc. 12)The Annual Equivalent calculation is similar but can be used to compareoptions that do not have the same time frame. An example, would be a leasethat you plan for 5 years with a purchase that will cover a 10 year period. Comparing options with equal lengths of time.13)If your analysis uses the same time period for each options, say 12 yearsfor the Purchase, Lease, and Rental/Custom, you can use the CummulativeNet Present Value column. Follow it down to the year (year 11 -see item number 2) above) to get the results for year 12. The option that costs the least amount of money (in current dollars) is the one withthe lowest Net Present Value paring options of Unequal length.14)If your analysis uses differing time periods, you must use the Annual Equivalent ................
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