Anthony wrote:
On 5/9/07, Ray Saintonge <saintonge(a)telus.net>
wrote:
Leasing companies do not simply vary their leasing
rates with the
current market interest rates. Also note that for a tax free company
the tax deductibility benefit from lease payments is not there.
I'm not sure what you mean by the first sentence. Interest rates
aren't the only factor in a lease, but they are a factor. As for the
tax benefits of leasing, right, that isn't a factor in the WMF
decision.
Then work out what the real interest rate is in a lease by summing the
present value of each payment and solving the resultant exponential
equation for the interest. You will see that the effective interest
rate will be considerably more than the current market rate of interest
charged by banks on loans.
Let's say the major fundraisers come twice a year.
Let's say a lease
can be had for 1/30 the purchase cost per month over 30 months.
Where are you ever going to find a 30-month lease that simply divides
the purchase price by 30. The ones that do that tend to have a stiff
buy out at the end of the contract. The server will more often than not
have a useful life that exceeds the 30 months.
Here comes the answer:
>That's a really high estimate, based on
Dell and rounding the cost up,
>and surely the WMF can do better.
>
>
I looked it up on Dell, and then rounded the cost up. The buyout
option is for fair market value. If you return the equipment at the
end of the lease, you owe nothing. I assumed that the WMF would not
want to exercise that option anyway. 30 month old hardware is
obsolete.
Some of our existing hardware is more than 30 months old, and still
doing its job. It may not be able to take on the more sophisticated
programs, but if it can still be a workhorse doing what it always has
done than it is still worth keeping.
If you think my numbers are way off, please tell me
what numbers you
think are more reasonable.
I'll be glad to use your numbers if you give me real numbers for a
specific hardware unit of your choice. As I said before this would be
1. The cash price of the unit,
2. The leasing fees added to the price of the unit,
3. The monthly payments, and
4. The buyout price at the end.
In these assumptions income tax deductibility would be irrelevant for a
non-profit company, and sales taxes won't matter as long as they are
applied pro-rata on everything.
Let's assume fundraisers of
$40,000, $100,000, $167,000, $300,000, and $500,000 (taken from the
financials, rounded, and estimating in order to break up into
semi-annual figures). Assume capital expenditures of $35,000,
$55,000, $85,000, $150,000, and $275,000 (same methodology).
The effects of fundraising should only have an indirect effect on
plans. It's far more useful to have a hardware plan that provides
regular replacement of equipment that is no longer useful. If we have
30 servers operational at a given time purchasing one replacement server
per month would be cheaper than the monthly lease payments on 30 servers.
Actually, it'd be about equal. But this isn't at all a realistic
scenario. Hardware needs are growing, not static, the servers are not
going to fail at such an even rate, and hardware is going to probably
last longer than 30 months on average. The first two points favor
leasing, the last favors buying.
Yes, hardware needs are growing, and it's the extra life beyond 30
months that allows you to pay for expanding needs.
With a lease, you spend $7000, $18000, $35000, $65000,
and $120000
each half year. With the extra cash flow you can easily hire a couple
of extra staff members plus pay a few consultants for "one-time"
things like security audits. From what I've seen of MediaWiki I have
little doubt the code contains serious security flaws, and I think we
all know that the system has numerous DOS attack points.
The downside of a lease - there's no capital left over at any stage of
the game. But considering that Wikipedia's value is currently about
99.9% goodwill anyway, I wouldn't call that much of a problem.
Goodwill remains an intangible asset, and that intangible asset needs to
be supported by very tangible hardware.. To do a proper analysis of the
situation we need to know the cash price for the piece of equipment, the
monthly lease payment, any setup fees for the lease, and the contract
buyout amount at the end of the lease.
As I said before, the contract buyout amount is irrelevant, because
I'm assuming the option won't be exercised. If it turns out to the
WMF's advantage to exercise the option, then that just swings the
situation even *more* in favor of leasing. As for the cash price for
the equipment, I took that from the financial statements. The monthly
lease payments were estimated as I explained above. The setup fees on
such a large contract would be negligible, likely less than half a
percent.
The terminal payout is key to the comparison. To make a true comparison
to not buying out the lease at the end one needs to assume that the fair
market value for the leased hardware is equal to the fair market value
of the purchased hardware if you were to sell it. If it's not realistic
to sell that computer then why is the leasing company trying to sell it
to you at an inflated price?
Ec