Anthony wrote:
On 5/10/07, Ray Saintonge saintonge@telus.net wrote:
Anthony wrote:
On 5/9/07, Ray Saintonge saintonge@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 I assumed that the WMF would not want to exercise that option anyway. 30 month old hardware is obsolete.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
- The cash price of the unit,
- The leasing fees added to the price of the unit,
- The monthly payments, and
- 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