Lease Equipment Instead of Purchasing

Owning equipment ties up capital and exposes the facility to maintenance, repair, and obsolescence risk. For equipment that is used intermittently, needed only for a short period relative to its useful life, or subject to rapid technological change, leasing can be less expensive than ownership. A lease converts a large upfront capital outlay into predictable periodic payments and often bundles maintenance and service, lowering the facility's total cost for that equipment.

ARC Code(s):

4.232 (Lease Equipment Instead of Purchasing)

Savings Calculation

Savings come from avoiding the annualized cost of owning the equipment, offset by the lease payments the facility takes on. This measure is justified when the equipment is used for only a fraction of its useful life, becomes obsolete quickly, or otherwise carries ownership costs that, spread over the period the facility actually needs it, exceed the equivalent stream of lease payments.

Annual savings are fthe difference between the avoided annualized cost of ownership and the new lease payments:

\[ \text{Annual Savings} = M_{\text{annual}} - L_{\text{annual}} \]

where the avoided annualized cost of ownership is:

\[ M_{\text{annual}} = \frac{P - S}{N} + O_{\text{annual}} \]

and:

$L_{\text{annual}}$ = total annual lease payments the facility takes on ($/yr)
$O_{\text{annual}}$ = annual operating costs of ownership avoided by leasing, such as maintenance, repairs, and insurance ($/yr)
$P$ = purchase price the facility would otherwise pay for an equivalent unit ($)
$S$ = expected residual (salvage) value at the end of the use period ($)
$N$ = period over which the facility expects to use the equipment (yrs)

The term $(P - S)/N$ annualizes the net capital cost of ownership, putting the one-time purchase on the same recurring basis as the lease payments. Note that $N$ here is the period the facility will actually keep the equipment, not necessarily its full engineering life. Short utilization or rapid obsolescence shrinks $N$ and the residual value $S$ the facility could recover, which drives the annualized ownership cost up.

Compare Ownership and Lease on the Same Basis

Confirm what the lease payment bundles. If maintenance, service, or insurance are folded into $L_{\text{annual}}$, then $O_{\text{annual}}$ should reflect what those same items would have cost under ownership, so the two sides stay like-for-like and nothing is double counted.

Anticipated Costs

There is no upfront implementation cost, since the purpose of the measure is to avoid the capital purchase entirely.