Calculating Lease Costs and Effective Purchase Price W/O interest

Jake,

No this is not a dumb question...here is the easiest way to do this:

$187.24/0.0302 = $6200

You will have an outprice say $5200
gross profit is $1000

Total = $6200

If someone wants to purchase outright instead of lease sell it for $6200 that way you will still be making $1000 profit.

Always start with your outprice of the machine first and build up from there. Every deal will be different based on the circumstances and your competition.

Does this make sense?

Thanks Montecore,

That makes sense from a business standpoint.

I'm still having a hard time with the math though.

If you are trying to figure out the effective purchase price, but only know the monthly lease payment, # months, and lease rate - do you have any ways to figure out the purchase price?

0.0302 percent of $6,200 is $198 so that only adds up to $6,339. But if you subtract $6,537 by $6,339 then you get $198 again. Suggesting that the purchase price is roughly 2 times the total lease cost. I dont know why.


I tried to prove this theory here:

If you multiply $5.65 x 36 you get roughly $203.

if you double it:

$203x2 = $406

Subtract it from the total lease cost to end user:

$6,537 - $406 = $6,131 - which is darn close to the $6,200 figure, but not quite.


Is there way to work backwards from the lease info (monthly rate, lease rate, # months) to figure this out?

Thanks

If Montecore's explanation didn't cover it for you, then there must be some confusion what the question is. The monthly payment divided by the rate factor is the original funding amount. You'll notice there is no multiplication in this equation so if there is in yours, then your goal must be something different than determining the original purchase price. If you are trying to replace a unit by providing something for the same monthly payment, Montecore's equation tells you what your sales price needs to be...Their monthly payment of $187.24 divided by your lease rate factor of .0302 = $6,200. That is the price your equipment has to be for you to be able to offer the customer the same $187.24 payment that they have been used to.

When rereading your posts I see that you are attributing a value to the lease rate which you cannot do. .0302 is not $.0302 nor is it 3.02% or any such thing. .0302 is just a factor. Behind the scenes of the lease company's spreadsheet there obviously is an interest rate that contributes to the establishment of the rate factor but the factor is a derivative of a multipile of issues that combine to establish a number (rate factor). It is really no different than the square root of pi being 1.7724 which is just a number...not a percentage of anything nor can it be converted into dollars and cents.

I got it.

Thanks guys.

The rate factor actual means $30.02 per thousand dollars so you could do it this way 6.2 x 30.20 = monthly payment.

You're getting good answers, but sometimes the third of fourth approach to answering the question helps. Not to imply that the previous answers are incorrect or incomplete.

1. "Lease Rate" is a convenience, given to you so that you can multiply your selling price by a number and end up with a payment acceptable to the lessor.

2. The "Short answer" from your leasing company is "We'll do that deal for 36 months at 0.0302".

3. The "Long answer" which they will seldom give you is:

- We believe that after 36 months, the value of the leased item to us (the lessor) will be 15% of its original selling price. So we are "taking a 15% residual position. I assume this is an FMV lease.

- We want to earn 12.88% on our leases.

- We have no need to communicate that information to our reps or our customers, so we'll come up with a rate factor. In this case, 0.0302 which will earn 12.88% if we assume a 15% residual.

Probably best Googling FMV and residual if this isn't clear, but basically...

On day one, the lessor will fund 100% of the funding to the dealer. The customer will make 36 payments of (.0302xfunding) to the lessor. At the end of 36 payments, if the equipment delievers 15% of its purchase price in value back to the lessor (and that value could be in the form of a buyout, or a new deal that otherwise would have gone to the competition, or wholesale value of the used machine), than the lessor earned 12.88%.

If the machine is of no value at lease end, the lessor only 5.5%. And obviously if the lessee doesn't make 36 timely payments and return the machine in agreed conditition, they can earn less than that.

With LIBOR spreads over 200, you can now see why it is difficult to secure leasing in the troubled SICs and Zips, since we are typically talking about light doc micro deals.

Sam Shallenberger
www.TheMacCFO.com
Twitter @TheMacCFO

Thanks Sam for that nice viewpoint. By the way I really enjoyed looking at your website...there was alot of eye opening info there....thanks!

GIntel:

Let me give you another example that starts to get tricky when you have a buyout to consider.

Here is the formula:
(Machine Cost + Buyout + Profit) X rate factor = total monthly payment that should be (but does not need to be) less than CURRENT monthly payment for similar equipment.

Define similar equipment? That means if they have a 20ppm unit now but they now need a 60ppm unit....there is a good chance the monthly payment will be higher as a result.

Overall customers like to see a monthly savings so they know they are getting a better deal than they have right now. Why pay more for a similar machine that does not make sense.

The tricky part say if they are on a 60mo FMV lease and have over 4 years remaining. They are not happy with the current vendor and want out. Well this will not happen. The B/O is way too high....unless they were raked over the coals the first time then it may be possible to help them. Remember the shorter the ORIGINAL lease term the more time needs to be expired in order to help them. Example 36mo FMV...the monthly payment will be higher so you have to wait close to 1 to 1.5 yrs to help them.

Please understand there are a bazillion different scenarios that I could list here. I just wanted to provide some food for thought so you can logically put your own scenarios together.

GIntel....I have one last scenario for you to consider and apply your skills. Customer is paying $389/mo 60mo FMV rate factor 0.0203 for a 60ppm unit. They have 2 yrs remaining. They really want to work with you. They are given 10,000 copies/mo built into the current lease then 0.0138 for overages. Their monthly volume is 20,000 per month. Your unit cost is $8000 and cost per copy 0.01.

1) With 2yrs left can you save them money each month and still make a profit? About how much profit?
2) With 1yr left can you save them money each month and still make a profit? About how much profit?

I hope this has been helpful for you.