W8_TOM_ Lease VS Purchase Impact to Profit & Loss Statement with Case Study: a Mini-Mart Business


1. Problem Definition

As I have mentioned in my previous blog (https://simatupangaace2014.wordpress.com/2013/10/18/w7_tom_-lease-vs-purchase-own-analysis-of-a-diesel-generator/) , I will try to simulate how Lease VS Purchase impacts the profitability (Profit and Loss Statement or P&L).

Continuing from previous blog, the case study is still a mini-mart business.

2. Development of Feasible Alternative

The simulation will be using Microsoft Excel which in my opinion is the best and the easiest software to generate an analysis.

3. Development Outcomes for Alternatives

The indicators I will use to compare how lease VS purchase giving impact to the P&L are:

  • Free Cash Flow For The Firm (FCFF)
  • Internal Rate of Return (IRR)
  • Net Present Value (NPV)

4. Selection of Criteria

To have the simulation (modeling) works, the step by step processes prior to generate the model are:

  • Prepare assumption of Sales per Month (Revenue) and assumption of annual incremental rate (%)
  • Prepare assumption of Expense per Month and assumption of annual incremental rate (%)
  • Prepare the assumption of Initial Investment (CAPEX)
  • Identify the economic life of the CAPEX
  • Tax Rate
  • Period of Investment (years)

5. Analysis of the Alternative

After all the assumptions/inputs are being prepared and the next step is generate the Profit & Loss Statement Projection based on:

  • Purchase of CAPEX basis
  • Lease of CAPEX basis

Referring to my previous blog (https://simatupangaace2014.wordpress.com/2013/10/18/w7_tom_-lease-vs-purchase-own-analysis-of-a-diesel-generator/) , that I have compared Lease VS Purchase of Generator Set, further in this model I will try to simulate it in a Profit & Loss Projecttion.

Below are two (2) table showing the P&L Projection of Purchase Basis and Lease Basis:

Table 1 – P&L Projection Purchase of CAPEX (Generator Set) Basis


Table 2 – P&L Projection Lease of CAPEX (Generator Set) Basis


6. Selection of Preferred Alternative

Here are the financial ratios as the result of the simulation:

Table 3 – Financial Ratios


Based on the result, Purchase basis is the most preferred alternative in order to get a better NPV, IRR and earlier payback period.

7. Performance Monitoring & Post Evaluation Result.

In this modeling/simulation I encourage anyone who would like to start their business for not funding the investment through a bank loan. If you could not fund the business alone then asks for partnership from anyone you trust or start a smaller business based on your affordable scheme. In my opinion, bank interest gives more disaster than good deed therefore please thinks hundreds time before you decided to proceed for a bank loan.

For anyone who are interested for the excel file of this P&L Projection, please send your inquiry to: tommy21.aace@gmail.com and I will be very pleased to share it with you.

REFERENCES

  1. 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.
  2. Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Engineering economy (15th ed.). Chapter 7 Depreciation and Income Taxes, Property Class and Recovery Period (pp. 297-298). 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. WordPress.com, W7_TOM_Lease VS Purchase (own) Analysis of a Diesel Generator.

    Retrieved on 24-Oct-13 from: https://simatupangaace2014.wordpress.com/2013/10/18/w7_tom_-lease-vs-purchase-own-analysis-of-a-diesel-generator/

  5. WordPress.com, FCFF Definition.

    Retrieved on 24-Oct-13 from: http://www.investopedia.com/terms/f/freecashflowfirm.asp

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1 Comment

Filed under Tommy Edward, Week 08

One response to “W8_TOM_ Lease VS Purchase Impact to Profit & Loss Statement with Case Study: a Mini-Mart Business

  1. Again, an excellent job, Tommy with a really good case study.

    My only question is while I can clearly see what you did and don’t see anything obviously wrong, one of the big advantages of LEASING vs OWNING is usually it not only frees up cash flows (monthly payments are generally lower) but also does not require a large cash down payment.

    Generally speaking for NEW START UP companies, LEASING is almost always the preferred or recommended decision if for no other reason than it conserves the use of scarce start up capital. Which makes me question whether you missed something in your calculation?

    So while I see no obvious errors in your calculations, I would urge you to do more research on the lease vs own just to make sure you didn’t miss something in your calculation?

    http://www.nolo.com/legal-encyclopedia/business-equipment-buying-vs-leasing-29714.html

    http://www.empire-cat.com/portals/contractor_portal/blog/buying_vs_leasing_construction_equipment.aspx

    http://smallbusiness.chron.com/business-tax-advantages-buy-vs-lease-vehicles-4315.html

    BR,
    Dr. PDG,, Jakarta

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