Financial Aspects of Equipment Acquisition

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• Financial Aspects of Equipment Acquisition

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Transportation Research CircularNumber E-C047
November 2002Financial Aspects of Equipment
Acquisition
http//www4.trb.org/trb/onlinepubs.nsf/web/circula
r?OpenDocument
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Whats Common About Purchasing Fighter Planes,
Motor Graders, Trucks and Cars?
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Making the Right Choices
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The Six Methods

• Rental
• Lease
• Cash Purchase
• Lease Purchase
• Any of the above combined with
• Repair, parts, and labor guarantees
• Manufacturers recommended maintenance
• Replacement equipment cost guarantees

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Sorting Through the Choices

• Do I want to only pay for the use of the
  equipment?
• Do I want to pay to own and use the equipment?

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Rental

• Good choice for short-term use of equipment.
  Minimum agency obligations and requirements.
• Pay for the use and not ownership.
• Good try before buying technique.
• Improves equipment utilization ratios and
  short-term job tasks with minimum fleet
  investment.

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Operating Lease

• Good choice for longer-term equipment needs while
  avoiding a relatively high investment.
• Paying for use not ownership.
• Often lower monthly payments than rental.
• Master lease plan option.
• Low cash-flow options.

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Cash Purchase

• Cash purchase is the lowest cost method for
  owning, operating, and disposing of a piece of
  equipment.
• Comparable to leasing or renting when combined
  with an effective contract for repairs, parts,
  and labor.
• Near ideal for long-term use of equipment.

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Lease Purchase

• Properly structured, offers one of the lowest
  financing costs to own and use a piece of
  equipment.
• No early payment penalties.
• Non-appropriation of funds clause.
• May be structured as a capital lease for
  application of capital budget funds.

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Lease Purchase

• Significant financial leverage
• Help facilitate a quick updating of aged fleets.
• Meet unexpected increased fleet quantity needs.
• Acquire more equipment immediately without
  exceeding annual budgets.

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Cash Purchase with Trade or Buyback Guarantee

• Normally more costly than a straight cash
  purchase.
• Bidder may be asked to also guarantee cost of
  repairs.
• Cost of ownership guaranteed and machine costs
  can be budgeted accurately.

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Comparing Alternatives

• Look at bottom-line effective costs.

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Sample 4WD Loader Bid

• Base Machine Price
• Front-Axle Hyd. Lock
• 17.5 x 25 12PR L2 Tires
• ROPS Cab Cloth Seat
• Bucket teeth w/RTD
• CW, DB, Fenders
• Factory freight
• Dealer Prep, insp, del
• MSRP
• Suppliers Bid Price

• 75,000.00
• 850.00
• 500.00
• 3,450.00
• 4,850.00
• 1,950.00
• 1,800.00
• 400.00
• 88,800.00
• 70,655.00

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Cash-Flow Comparisons
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Cash-Flow Comparisons
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Life-Cycle Bids

• Asking bidders to provide
• Purchase price for the machine
• Guarantee for repair costs, parts, and labor
• Guarantee buyback price for units purchased
• Option -- Guarantee for maintenance costs

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Total Cost Bid Examples
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Additional TCB Considerations

• Fuel consumption rates
• Ground-engaging tool wear
• Routine maintenance expense
• Equipment wholesale value
• Time value of money

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Time Value and WholesaleEquipment Value Analysis
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Time Value and WholesaleEquipment Value Analysis
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Time Value and WholesaleEquipment Value Analysis
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Thank You for Being A Great Audience
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Financial Aspects of Equipment Acquisition

• Questions

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