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Requirement

Product can model lease vs buy scenarios for assets

Functional Area

Planning

Industries
All
Tags
Capital Assets
Modeling
DETAILS

Description

Lease vs buy scenario modeling in Corporate Performance Management (CPM) software involves comparing the costs and benefits of leasing vs buying assets such as equipment, real estate, or vehicles. Such functionality enables businesses to make informed decisions for their capital asset management.

Example Use Case

Scenario: A mid-market corporation is planning a major expansion of its operations and needs to acquire new equipment. They are trying to decide whether they should lease or purchase these assets.

Solution: With the lease vs buy modeling feature in their CPM software, they can simulate various scenarios considering factors such as cost, tax benefits, and asset depreciation. For instance, in one scenario they could input the purchase price, financing terms, and depreciation rates for buying the equipment. In another, they could input lease rates, terms, and post-lease options. Comparing these scenarios would help them in determining the most beneficial approach for their financial and operational goals.

Considerations

CPM products with dedicated Capital Asset Planning modules often offer a lease vs buy model as a built-in tool. If the product does not offer this as a dedicated module, this can usually be configured with some consulting support. Make sure the product offers all the components needed for this kind of comparison such as:

Consideration Buying Leasing
Initial Costs Include purchase price, sales tax, delivery, and installation fees. Consider any initial fees associated with the lease agreement.
Financing Costs If financing the purchase, add cost of borrowing, including interest expenses. Account for interest or finance charges included in lease payments.
Payment Structure Detail payment terms, down payments, and loan terms if not paying upfront. Regular lease payments, noting escalation clauses or variable payments.
Depreciation and Amortization Calculate depreciation for tax deduction purposes. Operating lease payments are expensed; capital leases require asset and interest amortization.
Tax Implications Deductions for depreciation and loan interest. Deductions depend on lease type (operating vs. capital).
Maintenance and Operating Costs Include costs for maintenance, repairs, and operation. Include costs for maintenance, repairs, and operation. Note if leases include maintenance services.
End-of-Term Considerations Estimate the residual or salvage value at the end of its useful life. Options and costs for equipment return, purchase, or lease renewal.
Opportunity Costs Evaluate alternative uses of capital, including potential returns from other investments. Consider the capital's opportunity cost, potentially used elsewhere.
Flexibility and Risk Consider the risk of obsolescence and the flexibility to sell or upgrade. Assess the flexibility to upgrade technology and risks of being tied to outdated equipment.
Cash Flow Analysis Project and discount future cash flows to present value. Project and discount future cash flows to present value, including regular lease payments.

Certain considerations are challenging to calculate such as Opportunity Costs. That calculation will require a broader adjustment to the financial model, which should be accomplished by created a new version of the budget or forecast and going from there.

Questions to Ask a Vendor

  • Scenario Capabilities: How detailed and customizable are your lease vs buy scenario modeling features? Can they simulate a range of factors of tax, cashflow, etc.? (see table above)
  • Scope in Model: Is the comparison centralized in the Capital Asset module, or will we see the effects ripple through the entire model?