Every business manager is tasked with managing corporate assets. Among the assets are the companys personal property that are necessary to achieve its many and varied goals. An excavator needs excavation equipment. A passenger airline needs passenger aircraft. Every business needs a means to communicate. Equipment to access the telephone network and the Internet includes phone systems, servers, personal computers, printers, personal digital appliances, and cell phones Internal to a business operation, one may set up networks so that the various operational departments can have access to key customer, vendor, production, inventory, maintenance and accounting information. Every department requires equipment to fulfill its task. To deliver its products and services, every business needs equipment suitable to its particular needs.
Once the equipment need is identified, one determines whether one should purchase it outright, or on installment, or not at all. One must always ask, "how long will the equipment be used?" What are the equipment wear and tear characteristics? What is the generally accepted useful life of the equipment? How important is the equipment to the main business mission? What are the short and long term tax and accounting considerations? Will corporate profitability be better served by postponing a purchase decision? Can the equipment be purchased on an installment plan? If an installment purchase, what term is best for the company? Should it be determined that ownership of the asset is not important to the corporate objectives, then a true lease or an operating lease would be appropriate.
The value of the asset at the end of the lease may be the key whether to purchase or to lease. Mining equipment in down-hole operations are constructed for long-life tasks and may never see the light of day for evermore. This decision is quite simple. It must be purchased. At the other end of the spectrum, is equipment that wears out quickly and is a disposable or an ingredient product, it too should be purchased. Volatility of technology is a life-term consideration. It is this consideration upon which the bulk of purchase/lease decisions will turn.
Most servers and computer products seldom have life expectancies beyond five years. Short term leases of 3, 4, or 5 years are quite common. Other assets such as fork lifts, excavation and transportation equipment have useful lives of ten or more years. Lease terms of this equipment type can be 3 to 6 years. Most companies would prefer to do an operating lease based on an internal appraisal of very limited expected residual value or the high cost of retention. In this last case, there would be issues relative to the cost of maintenance over time. When that expense-curve reaches a certain point, many companies will displace it with newer, improved, warranted versions.
An operating lease is a lease that offers the lessee the lowest possible periodic rent, monthly or quarterly. The leasing company assumes an equity position in the equipment and wagers that its residual assumption will be realized and its return will be justifiably superior to the residual risk it has assumed. The equipment leasing company assumes the risk of the future value. There are true leases that offer beneficial rentals that are slightly below an installment purchase lease. The leasing company will insist on end-of-lease terms that offer the lessee an option to renew the lease at the then current fair market value.
