W7_TOM_ Lease VS Purchase (Own) Analysis of a Diesel Generator


1. Problem Definition

I am planning to start my own business and one from many business options seems favorable to me is investing in retail sectors which is a mini-mart at suburban area.

I wanted to have a 24 hours service mini-mart therefore need to have a Diesel Generator as a back-up power.

For information, a diesel generator is the combination of a diesel engine with an electric generator (often an alternator) to generate electrical energy.

Diesel generating sets are used in places without connection to the power grid, as emergency power-supply if the grid fails, as well as for more complex applications such as peak-lopping, grid support and export to the power grid. Sizing of diesel generators is critical to avoid low-load or a shortage of power and is complicated by modern electronics, specifically non-linear loads. (Source: http://en.wikipedia.org/wiki/Diesel_generator)


Picture 1- Diesel Generator

Source: http://acehardware.co.id/product/product_detail/1398#.Ul9hk9Lwmnk

2. Development of Feasible Alternative

Generator set (Gen-set) is the most proven and the best solution for the requirement of back-up power. Gen-set is not inexpensive equipment however gen-set is a must since I wanted my mini-mart is a 24 hours open service.

3. Development Outcomes for Alternatives

Leasing of assets is a business arrangement that makes assets available without incurring initial capital investment costs of purchase (Engineering economy (15th ed.) pp. 539).

Does leasing is a better alternative instead of purchase?

4. Selection of Criteria

Following Table-1 showing what are the required input in order to analyze the lease vs purchase alternative:


Table 1 – Input Worksheet.

Gen-set purchase price is Rp 271,300,000 (http://acehardware.co.id/product/product_detail/1398#.Ul9hk9Lwmnk) with estimated usage life of 5 years.

Assumption monthly lease payment is Rp 62 million per year or Rp 5.2 million per month. The lease duration is 5 years or 60 months (according to the usage life of the gen-set).

5. Analysis of the Alternative


Table 2 – Analysis Worksheet (http://office.microsoft.com/en-us/templates/operating-lease-vs-own-analysis-TC001184175.aspx)

Based on the analysis using Present Value approach, Lease has come out as a better alternative.

However is using Present Value as the basis to decide that lease is the best alternative is good enough?

6. Selection of Preferred Alternative

There are some advantage and disadvantage of each alternative which are:


Table 3 – Advantages and Disadvantages of Lease VS Purchase Generator Set.

Based on this table I would say that lease is a more favorable alternative. It is created a monthly routine fixed cost however at the end of the period it will contribute a positive feedback to the Mini-mart profitability.

7. Performance Monitoring & Post Evaluation Result.

Focus of this blog is to give information to the readers that there are two alternatives of capital (assets) investment decisions: purchase or lease.

In forthcoming blog, I will try to simulate how Lease VS Purchase impacts the profitability (Profit and Loss Statement).

REFERENCES

  1. Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Engineering economy (15th ed.). Chapter 5 Evaluating Single Project, The Present Worth Method (pp. 181-182), The Capitalized-Worth Method (pp. 187). Boston, MA: Prentice Hall.
  2. Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Engineering economy (15th ed.). Chapter 13 The Capital Budgeting Process, Leasing Decisions (pp. 539). Boston, MA: Prentice Hall.
  3. Amos, S.J. (2012). Skills & Knowledge of Cost Engineering, 5th Edition Revised. In G. Levin (Ed.), Chapter 27, Basic Engineering Economics, Discount Factors (pp. 27.4). Morgantown, WV: AACE International.
  4. Investovedia.com, Discounted Cash Flow.

    Retrieved on 26-Sep-2013 from: http://www.investopedia.com/terms/d/dcf.asp

  5. Miscrosoft.com, Operating Lease VS Own Analysis

    Retrieved on 17-Oct-13 from: http://office.microsoft.com/en-us/templates/operating-lease-vs-own-analysis-TC001184175.aspx

  6. Aceharware.co.id, Diesel Generator Price.

    Retrieved on 17-Oct-13 from: http://acehardware.co.id/product/product_detail/1398#.Ul9hk9Lwmnk

  7. Wikipedia.org, Diesel Generator Definition.

    Retrieved on 17-Oct-13 from: http://en.wikipedia.org/wiki/Diesel_generator

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6 Comments

Filed under Tommy Edward, Week 07

6 responses to “W7_TOM_ Lease VS Purchase (Own) Analysis of a Diesel Generator

  1. EXCELLENT Tommy!! I love your case study and you did a great job on your analysis.

    My only advice to you would be to get at least one week AHEAD on you blog postings. By building in a BUFFER or CONTINGENCY, IF something should happen (Risk Event) then you will have something in place to protect yourself from any negative impacts.

    Does this idea make sense to you?

    Keep up the good work!!

    BR,
    Dr. PDG, Jakarta

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