Purchasing and Business Services Manual (PUR)

Effective: 5/1/1987

Revised:

PUR 602–01: Lease vs. Buy Considerations

Purpose

To determine whether buying or leasing is the preferred method of acquisition of capital equipment

Source

University policy

Policy

Capital equipment is generally acquired by outright purchase. Occasionally, however, circumstances may require the leasing of equipment to satisfy specific needs. Either a lease or a lease/purchase may be used to lease capital equipment.

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Analysis of Economic Soundness

Before entering into any lease agreement, the economic soundness of buying vs. leasing will be analyzed. Points to consider in deciding to lease or buy are:

1. Funds may be insufficient for outright purchase.

   A department may have operating funds but no capital funds for the purchase of equipment.

2. The useful life of a piece of equipment may be determined by:
   
   1. application life

      How long will the equipment be used? If the period of use is relatively short, leasing may be preferred over purchase.

   2. technological life

      When will the equipment become obsolete? Rapidly evolving technology tends to hasten obsolescence. Leasing may be advisable when obsolescence is a factor.

   3. physical life

      When will the equipment be worn out?

   Leasing may be advantageous if the total cost of a lease for the period of the application life or the technological life is less than the purchase price.

3. The total cost of the lease must be compared with the total cost of purchase taking into consideration such factors as equipment costs, maintenance costs, interest, taxes, and insurance.

Note:

Contract Protection If leasing is determined to be the preferred method of acquisition, care should be taken to provide contract protection for the university regarding guarantees, fiscal funding-out clauses, tax assessments, and other items. Acquisitions Involving Federal Funds If federal funds are involved in the acquisition of the equipment, it must first be determined that the source of funding allows for leasing.

Cross-Reference

For related information, see PUR 602–03, “Installment Purchases.”

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