|
Of all the facilities in an engineering laboratory, test equipment almost 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 short-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 short
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. However,
when the equipment is required for 12 to 36 months, leasing is a compelling alternative to an outright
purchase. 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 purchase 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 little
sense because you have already paid for nearly all of it.
For accounting purposes, all finance leases are treated
as asset purchases, 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. However, at the end of
the lease you have the option to purchase the equipment
for its fair 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 important difference is that Electro Rent allows the
FMV purchase 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
purchase 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 purchase it for the amount of FMV.
As you can see from the comparison between an
operating lease and an outright purchase (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 purchase.
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 short, leasing can
be a verifiable way to reduce costs without sacrificing
test capabilities, producing a demonstrable benefit
financially as well as subjectively. |
