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Grand Rapids, MI | Luke--
In making a decision on a new asset, I like to split the decision into two pieces. First does it add value to your business? I am an economist, so I am defining value as returning you more $ than it costs you, including the opportunity cost of your capital. Basically does it increase profits on your farm? It sounds like you have done this step and the answer is yes since you are looking on.
The second step is to determine whether it is financially feasable. This just basically means can you come up with the cash and financing method to make it happen. This is what I am responding to at this piont, the first question would require a whole other analysis.
In general leases require less capital to be used than purchase/finance. This would mean the higher the value you place on your capital (either because it is in limited supply or you have other projects it could be used for that give high returns or both) the more likely you are to lease. I couldn't quite interpret the numbers you posted, but if the lease is truly based on 5.9% that is not a bad deal. Looks like a sales promotion of some sort as that is below market rates. Of course then you need to look at if there are cash discounts or similar discounts on financing that you are passing up to get that rate and factor that in.
Just a note, I tried to interpret the numbers you posted and I don't think I am understanding something, or am missing something. For example I ran a $110,000 value on the tractor, with $10,000 due at lease signing, then $14,700 paid at the end of years 1-5. This came back to a 6.64% interest rate. Still not bad, but not what you quoted at 5.9% Are there taxes on the purchase, or other fees buried in the deal?
Hope this helps,
Loren | |
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New or used MFD/ Lease or Buy
