Test Equipment Leasing and Test Equipment Rental
Of all the facilities in an engineering laboratory, test equipment nearly invariably ranks as the top capital equipment expenditure. Regardless of the number of instruments you have, there always seems to be a need for more to perform specialized tests, increase test speed, or meet a particularly stringent test specification. To satisfy this seemingly unquenchable need for instruments, you can buy, rent, or lease them, depending on the specific nature of your needs. You may already rent test equipment to meet small-term requirements or to fill the gaps between capital equipment budget cycles. Renting is very cost-effective for delivering the right technical solution for a small period (usually 12 months or less) because you pay on a month-by-month basis, and simply return the instruments when you no longer need them. But, when the equipment is required for 12 to 36 months, leasing is a compelling alternative to an outright buy. Leasing can provide unique tax advantages, allow you to utilize the most advanced equipment, and lessen the cost burden of populating your test lab. It can also let you obtain all of the test equipment you need immediately, at only a fraction of the cost of buying it.
Leases defined
The National Accounting Standards Board (NASB) defines two classes of leases: finance and operating. When you choose a finance lease (also called a capital lease), you simply agree to pay the lessor (the leasing company) a fixed number of payments, and buy the equipment after the last payment for either $1 or 10% of its original cost. Instead of buying the equipment at the end of a finance lease, you can also return it, but this makes small sense because you have already paid for nearly all of it. For accounting purposes, all finance leases are treated as asset buys, which means you must include them on the balance sheet and depreciate the equipment over its lifetime. If you lease your car, you already have experience with an operating lease. Like the finance lease, it is structured with a fixed number of payments. But, at the end of the lease you have the option to buy the equipment for its honest market value (FMV). FMV can be determined either with a fixed equity schedule at the inception of the lease or negotiated at the end of the lease. One vital difference is that Electro Rent allows the FMV buy option to be exercised any time after 12 months regardless of the original term of the transaction. If capital funds do become available, the operating lease can be terminated through the exercise of the buy option.
Operating lease payments for a given instrument are generally much lower than they would be for a finance lease because you are paying only for use of the equipment, and the lessor is responsible for reclaiming its residual value by selling it or leasing it to another customer. At lease end, you can simply return the equipment, or you can buy it for the amount of FMV. As you can see from the comparison between an operating lease and an outright buy (Table 1), the operating lease has significant benefits from a financial perspective. It also lets you satisfy your measurement needs immediately without the massive upfront costs of an outright buy.
A classic example
Let’s look at an example that is typical of the situation of many companies (Table 2). You need three spectrum analyzers in the initial stages of a development program. The list price of each one is $50,000, for a total of $150,000. You choose to lease the analyzers for 24 months at a cost of $1,100 each per month. The total monthly fee is $3,300. At the end of the 24-month lease, you determine that you really only need one of the analyzers in the future, so you return the other two. Your cost for leasing the three analyzers over 24 months is $79,200. If you bought one of the analyzers at lease end, you would pay $34,160, for a total cash outlay of $113,360. Since you lease, the actual cost is reduced because the payments are spread over 24 months. In addition, the lease payments are treated as deductible business expenses, so at the current 35% federal tax rate, the tax savings alone would reduce the lease payments from $79,200 to $51,480. This in turn reduces the total cost from $113,360 to $85,640. This is a significant savings over the $150,000 initial cost of the three analyzers. In addition, since you do not really need the additional analyzers, your benefit is increased since they are not sitting idle. If you bought the instruments, you would still own the three analyzers after 24 months, although they might not be needed. In small, leasing can be a verifiable way to reduce costs without sacrificing test capabilities, producing a demonstrable benefit financially as well as subjectively.
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