Purchase Equipment Instead of Leasing

Leasing converts a capital purchase into recurring payments, but those payments embed the lessor's financing charge, profit margin, and the cost of services the facility may not need. For equipment that is used continuously and kept for most of its useful life, the cumulative lease payments routinely exceed the cost of owning the same unit outright. Purchasing eliminates that recurring premium and lets the facility recover residual value when the equipment is eventually retired or sold.

ARC Code(s):

• 4.231 (Purchase Equipment Instead of Leasing)

Savings Calculation

Savings come from avoiding the lease payments the facility currently makes, less any operating costs of ownership the facility takes on in their place. This measure is justified when the equipment is used heavily and kept for most of its useful life, so the recurring lease premium is paid year after year against an asset the facility could have owned for less.

Annual savings are the avoided lease payments less the operating costs of ownership taken on:

where:

• \(L_{\text{annual}}\) = total annual lease payments the facility avoids ($/yr)

• \(O_{\text{annual}}\) = annual operating costs of ownership taken on, such as maintenance, repairs, and insurance ($/yr)

If the equipment is used heavily over most of its useful life, the avoided lease payments dominate this difference and the measure is favorable. Short or intermittent use leaves the avoided lease payments too small to justify the purchase, which is what tips the comparison back toward leasing.

Anticipated Costs

The implementation cost is the purchase price \(P\) of the equipment, obtained from a vendor quote or available online pricing for a unit equivalent to the leased one.