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Delaying a Purchase is Expensive
In an attempt to spend their money wisely, many government
agencies delay buying new equipment and/or facilities for
as long as possible. Few appreciate how much these delays
actually cost them in inflation. The reality of the situation
is that the inflation of capital equipment normally outpaces
the low tax-exempt interest rates found in leasing with
governments.
To understand this, consider the assumption that the purchase
price of new trucks or equipment has been increasing over
the last number of years due to increasing costs of materials
and equipment - lets assume we estimate this increase to
average about 4% per year. The inflation identified above
would cause equipment of $180,000 today inflating to $218,997.52
in five years - a $38,997.52 increase. At the same time,
if you lease that $180,000 fire truck today, you will pay
$27,877.32 in interest on your lease over the same 5 year
period.
It is easy to see why it makes sense to spend $27,877.32
to save $38,997.52 - a $11,120.20 savings!
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In 5 years, the cost of a $180,000
fire truck will inflate by:
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$38,997
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Over the same 5 years period, the
interest cost on a tax-exempt lease will be:
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- $27,877
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The savings you will realize by
leasing your fire truck now will be:
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$11,120
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In summary, it is commendable that you are working so hard
to save your agencies money by avoiding interest payments.
However, it is imperative that you consider the cost of
inflation as well as interest in your decision making. It
is also important to understand the benefits that the government
is giving you with tax-exempt leases and - -
Buy your
Equipment now and lease them!
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