Telecom Equipment: Should You Buy or Lease?
There comes a time in the life of any business when decisions
must be made for selecting the telecom equipment that will best
suit the needs of that business - now and for the foreseeable
future.
During the research and decision-making phases, one question
often arises: Should we buy or lease?
Early 20th century billionaire J. Paul Getty once suggested that
one should "lease that which depreciates and buy that which
appreciates."
Since telecom equipment is a depreciating asset, and the
underlying technology changes constantly, one could surmise that
from a financial viewpoint leasing is preferably over buying.
>From a cash flow perspective leasing does indeed offer the best
opportunity for preserving working capital to be used for
funding those expenses which cannot be defrayed.
How to Conduct a Lease vs. Buy Analysis
The best way to make your telecom equipment acquisition decision
easier is to perform a Lease vs. Buy analysis. To do that
successfully, you will need to consider a few key factors:
* The timing of the payment schedule vs. your monthly cash
availability.The interest rate of the lease vs. the interest
rate of borrowing the money to buy the equipment or technology.
* The interest rate of the lease vs. the loss of interest
earned by not keeping the money invested.
* The tax benefits afforded b leasing vs. the tax ramifications
of using a depreciation schedule. These figures must include any
available investment tax credits which may accrue if you buy.
(Your accountant will help you with this one!)
* The net cash outlay of the lease which is determined by
subtracting the tax savings, if any, from the annual lease
payment. Do this for every year of the lease.
Keep in mind that your net cash outlay also needs to be
discounted to offset the effect of the time value of money.
(Again, your accountant can be very helpful in helping you to
understand the finer points here.)
Always attempt to determine the salvage value of the equipment
after the lease expires. This is important because this number
indicates the residual value of the asset after its useful
lifespan. If the item has a high residual value, lease costs
should be lower. (If it has a low residual value then the lease
costs will be correspondingly higher.)
Tax Advantages of Leasing
Leasing also provides tax advantages in that the cost of the
lease is usually deductible as an ordinary business expense in
the year that is was incurred, while a purchase of a capital
asset must usually be depreciated according to the applicable
IRS tax schedule. (Your accountant will know what the limits are
for determining when and how an asset must be depreciated, so be
sure to check with him or her before you make any final
commitments.)
In general, leasing provides a method for the organization to
derive 100% of the benefit of the leased technology for a
portion of its actual cost. That's because leasing costs are
calculated across the time that the equipment will be in
service, and not the full price of the equipment or technology
being leased.
But are these tax savings always beneficial? A big part of that
answer depends upon three factors:
1. The cost of the item or technology being leased.
2. The expected usable lifetime of the item or technology being
leased.
3. Other financial considerations including the cash position of
the company considering the lease, the cost of money, and the
advantages to the organization of having the extra cash
available in their bank account to be used for other purposes.
Consider Leasing AND Purchasing
If you are considering replacing your current PBX with a virtual
PBX and VOIP services, a case could be made for doing a bit of
leasing AND a bit of buying.
It may make sense to lease the telephone handsets and routers,
both as a hedge against feature creep as well as the benefit of
being able to write off the costs rather than depreciate them;
and it may also make sense to buy the software if you do not
expect the technology to change so radically that it will be
obsolete before you have realized a good return on the
investment.
The case for buying the software becomes stronger if your vendor
includes a reasonable upgrade path along with an affordable
maintenance contract.
While analyzing each of these financial issues can help you
reach the right decision, there simply be times when the lease
vs. buy costs and benefits are close enough that the differences
are negligible. In that case, use your gut instincts and forge
ahead.
For more information and resources for managing and reducing
corporate telecom costs, visit http://www.telconassociates.com
for telecom auditing
and telecom bill
management.