Lease or Buy? Which is best?

Should an organisation lease equipment, or should it buy equipment? It’s a question faced by all organisations at some stage when there’s a need to get more equipment than there is money available to pay for it. Using a finance option of some type looks to solve this problem.

This seems to be a simple decision to make. If an organisation needs 20 of an item immediately, but can only afford the payment for 10, a lease or hire purchase agreement will allow them to obtain 20 straightaway and to pay for them over a period of time. The benefit of the 20 items is received for the organisation from the beginning.

I’ve come across two major arguments in favour of leasing in a school environment.

  1. Leasing frees up capital (cash) to pay for other items
  2. Leasing sets up a regular refresh cycle

I don’t think the second argument is necessarily valid for schools. In essence it’s working on the basis that a school can’t plan effectively for replacement of equipment as it reaches the end of its life.

But leasing requires planning anyway – a school entering into a lease agreement is planning to be spending a regular amount, typically over the next 3 years, and implicitly planning to either buy or start a new lease agreement at the end of the agreement.

Schools should be able to plan for regular refresh cycles. A good exercise to do is to list all of the equipment which you have in your school, and add want you want to have. Then, add the typical costs of the items, their lifespan and the number of each which you have. Add some columns for the next few years (at least 5, maybe 10), and then spread the costs of each item evenly over the columns. You should end up with a spreadsheet similar to this;

AdjustedCashflow

In this fictional example a school wants to have 1 computer, 1 projector and 10 iPads in each of its 6 classrooms. They also need to have an Access Point in each classroom and 3 network switches are required to cover the campus. The expected life of each is shown. The costs are indicative only to show calculate the annual cost. What this tells us is that should the school be deciding to purchase all of its equipment it will need to be spending around $23,000 each year.

The total cost of this bundle of equipment is $77,300. A current New Zealand online finance calculator gives a monthly payment of $2,575 per month as a lease cost for this, an annual payment of $30,900. This is higher than the figure calculated above. Firstly and obviously it includes the finance costs. It’s also higher as it is calculated on the basis of a three year agreement. For equipment which has a longer life (projectors, access points, switches, phone systems) this doesn’t make sense.

Of course, it’s not necessarily possible to spread purchases evenly like this – purchasing access points in 1s and 2s isn’t likely to deliver the same type of access point each year as vendors upgrade their models, and most likely doesn’t deliver a good wireless solution needed for good IT use in classrooms.

The initial spreadsheet could be adjusted to be more like this;

StraightlineModel

Here there are some years where the expenditure is higher than others, and with some balancing this can be evened out by sometimes extending the life of an item by a further year, or replacing it a financial year earlier if needed. This model assumes that there is already some IT equipment in a school (eg network switches) – your model will be different depending on what you already have.Obtaining IT equipment without using lease arrangements and ensuring a regular replacement cycle can be a difficult position to get into. However, it can be done with planning.

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One thought on “Lease or Buy? Which is best?

  1. Another factor to think about in the lease versus purchase argument is how the taxation factor kicks in. Lease can be structured as an operating expense, and so is fully and immediately tax-deductible, whereas purchase of equipment has to be depreciated over time, which may be tax-advantageous.
    Consider also that lease can offer advantages in terms of value of the dollar spent. Spend $10 today, and that is worth more (in purchasing power) than $10 in three year’s time. So delayed payment (by lease) can be advantageous.

    Reply

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