Anthony wrote:
On 5/10/07, Ray Saintonge <saintonge(a)telus.net>
wrote:
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.
Of course it is. Interest rates are still a factor though. As
interest rates go down, leases tend to become more favorable.
Sure. It's primarily a matter of being competitive with other lessors.
How does the rate of interest compare with an ordinary back loan? That
is another option for someone with cash flow problems.
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want to exercise that option anyway. 30 month old hardware is
obsolete.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.
30 month hardware will still work, but in my experience it's almost
never cost effective to buy such hardware instead of buying new.
Buying 30-month old hardware is a questionable practice for anything
critical, but hardware that was bought new 30 months ago can keep doing
the job that it was designated for. This is especially the case if it
has consistently behaved well for all that time. My oldest active
computer still has Windows 3.11, and was set up in November 1993. I
would not give it any important new jobs, but it still works well for
what it was intended after 162 months.
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.
Power Edge 6800
Cash price of the unit: $5,000.
Leasing fees: $75.
Monthly payments: $167/month
Buyout price: Fair Market Value
The present value of each payment made at the beginning of each month
(p0 to p29) is 167/(1+i/12)^pn where i is the effective interest rate
and pn is the payment number. For the sum of these plus the leasing
fee to be equal to $5,000 the interest rate would need to be 1.4%. To
make the comparisons equal we have to assume that at the end one gets to
keep the hardware at no cost.
A $1,000 payout at p30 taken to its present value would mean an implicit
interest rate of 14.6%; a $2,000 payout would imply an interest rate of
23.9%.
Yes, hardware
needs are growing, and it's the extra life beyond 30
months that allows you to pay for expanding needs.
Only if you have the capital to do so in the first place. Wikimedia
doesn't. The budget is stretched horribly thin, to the point where
unacceptable tradeoffs are being made.
That may be so, but it's irrelevant to the analysis. One needs to
analyse the deal in its own right, and only after that has been done
does one determine what one's budget will allow, and whether the cash
flow benefit will be worth the extra cost. One also needs to weigh in
the possibility of a conventional bank loan.
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?
Selling used hardware takes effort and costs money. While it's true
that the WMF could potentially sell its hardware after 30 months, they
wouldn't receive fair market value for it, because of the overhead
costs. The fair market value of a server after 30 months is small.
The overhead would make such a sale prohibitive.
If the fair market value of the server is so small after the 30 months,
then the payout should be just as small. There would be no point to the
lessor taking back old equipment if all it's going to do with it is
throw it in the trash, and in some cases even incur recycling costs.
Ec