Buy, Lease, or Rent

The major hardware pieces in the data centre are due for replacement. This will involve a fairly
large capital outlay for your company in the next budget. Therefore, it will be prudent to examine
the options available. You have discovered that you can either buy, lease, or rent equipment.
Before setting out to get quotations, let us consider the options together to better understand
how they would play out in our case and how the different parameters involved interact.

This exercise was written as a basis for class discussion. It illustrates neither the effective nor ineffective
management of the given situation. Data provided may be entirely hypothetical.

LeongTY 493131560.xlsx/Home
Buy, Lease, or Rent © 2007 Leong Thin Yin. All rights reserved.

Data
Option Months Price Salvage Monthly Description
Buy 36 $80,000 $1,800 Pay $80,000 to buy the equipment and
expect to sell it for $1,800 at the end of
36 months.
Lease 36 $1,800 $2,400 Pay $2,400 monthly to lease the
equipment and reserve the right to buy it
for $1,800 at the end of 36 months.

Rent 36 $2,350 Pay $2,350 monthly to rent the

equipment for a contracted period of 36
months.

LeongTY 493131560.xlsx/Proto
 Questions
?How to compare the options? Which is the best
?What can happen after 36 months
?Who is bearing which risks in each situation
?What is the main risk factor
Why would the favorable option to you as lessee be favorable also to the
?lessor
?Can the salvage (or terminal) value be larger than the original purchase price
?What if the salvage value is larger than the original price
What if the salvage value is uncertain (when the salvage value is larger or
?smaller than the original price)
?How does corporate tax affect your decision? What is the best choice now

LeongTY 493131560.xlsx/Proto
Buy, Lease, or Rent © 2007 Leong Thin Yin. All rights reserved.

Data
Option Months Price Salvage Monthly Description
Buy 36 $80,000 $1,800 Pay $80,000 to buy the equipment and
expect to sell it for $1,800 at the end of
36 months.
Lease 36 $1,800 $2,400 Pay $2,400 monthly to lease the
equipment and reserve the right to buy it
for $1,800 at the end of 36 months.

Rent 36 $2,350 Pay $2,350 monthly to rent the

equipment for a contracted period of 36
months.

Model
Rate Nper Pv Fv Pmt
0.33% 36 $80,000 $1,800 $2,409

Month Payment Interest Repay_Ppl Balance

$80,000
1 -$2,409 $266.67 -$2,676 $82,676
2 -$2,409 $275.59 -$2,685 $85,360
3 -$2,409 $284.53 -$2,694 $88,054
4 -$2,409 $293.51 -$2,703 $90,757
5 -$2,409 $302.52 -$2,712 $93,468
6 -$2,409 $311.56 -$2,721 $96,189
7 -$2,409 $320.63 -$2,730 $98,918
8 -$2,409 $329.73 -$2,739 $101,657
9 -$2,409 $338.86 -$2,748 $104,405
10 -$2,409 $348.02 -$2,757 $107,162
11 -$2,409 $357.21 -$2,766 $109,929
12 -$2,409 $366.43 -$2,775 $112,704
13 -$2,409 $375.68 -$2,785 $115,489
14 -$2,409 $384.96 -$2,794 $118,283
15 -$2,409 $394.28 -$2,803 $121,086
16 -$2,409 $403.62 -$2,813 $123,899
17 -$2,409 $413.00 -$2,822 $126,721
18 -$2,409 $422.40 -$2,831 $129,552
19 -$2,409 $431.84 -$2,841 $132,393
20 -$2,409 $441.31 -$2,850 $135,244
21 -$2,409 $450.81 -$2,860 $138,103
22 -$2,409 $460.34 -$2,869 $140,973
23 -$2,409 $469.91 -$2,879 $143,852
24 -$2,409 $479.51 -$2,889 $146,740
25 -$2,409 $489.13 -$2,898 $149,639
26 -$2,409 $498.80 -$2,908 $152,546
27 -$2,409 $508.49 -$2,918 $155,464
35 -$2,409 $587.20 -$2,996 $179,157
36 -$2,409 $597.19 -$3,006 $182,163

LeongTY 493131560.xlsx/Model
 Questions
?How to compare the options? Which is the best
?What can happen after 36 months
?Who is bearing which risks in each situation
?What is the main risk factor
?Why would the favorable option to you as lessee be favorable also to the lessor
?Can the salvage (or terminal) value be larger than the original purchase price
?What if the salvage value is larger than the original price
What if the salvage value is uncertain (when the salvage value is larger or smaller than the original
?price)
?How would corporate tax affect your decision? What is the best choice now

Documentation
Rate B12 <Input>
Nper C12 <Input>
Pv D12 <Input>
Fv E12 <Input>
Pmt F12 =-PMT(B12,C12,D12,E12)

Opening balance F15 =D12

Payment C16 =-F$12
Interest D16 =F15*B$12
Principal repayment E16 =C16-D16
Balance F16 =F15-(C16-D16)

LeongTY 493131560.xlsx/Model