Brindle Tool Hire: buy or lease battery-powered equipment
Brindle Tool Hire runs 11 depots and has an overdraft facility of $600,000, of which $520,000 is currently drawn. It is considering replacing 40 ageing mains-powered breaker units with battery models, because customers are refusing the older units on sites without power. Buying 40 units costs $480,000 and is expected to generate net cash inflows of $150,000 a year for five years, after all running costs but before depreciation, plus a residual value of $40,000 at the end of year five. Brindle's weighted average cost of capital is 12% and its bank charges 9% on the overdraft. Alternatively, a supplier will lease the same 40 units for $118,000 a year for five years, payable at each year end, including maintenance and replacement of failed batteries. Discount factors at 12%: year 1 0.893, year 2 0.797, year 3 0.712, year 4 0.636, year 5 0.567. The finance director argues that buying is always cheaper because 'you own the asset at the end'.
1. Calculate the payback period and net present value of buying, and the present value of leasing. Ignore taxation.
Read the worked answer
Payback (buy). $480,000 ÷ $150,000 = 3.2 years (3 years and about 2.4 months). The residual value shortens this slightly, but payback ignores it.
NPV of buying.
- Annuity factor for 5 years at 12%: 0.893 + 0.797 + 0.712 + 0.636 + 0.567 = 3.605
- PV of inflows: $150,000 × 3.605 = $540,750
- PV of residual: $40,000 × 0.567 = $22,680
- Total PV: $563,430
- Less initial outlay: $480,000
- NPV = +$83,430
The project is acceptable on its own: it earns more than the 12% cost of capital.
PV of leasing. $118,000 × 3.605 = $425,390.
Like-for-like comparison. This is the step the finance director misses. Both options deliver the same $540,750 of operating inflows, so the decision turns on the cost of obtaining the equipment:
- Buy: $480,000 outlay less $22,680 residual = $457,320 PV
- Lease: $425,390 PV
Leasing is cheaper by $31,930 in present value. The $40,000 residual is real, but it is smaller in present-value terms than the saving from not paying $480,000 up front. Over the five years, lease payments total $590,000 against $480,000 for buying - the raw totals favour buying, but the timing of the cash flows reverses the decision.
2. Evaluate whether Brindle should buy or lease, taking the overdraft and the finance director's view into account.
Read the worked answer
Cash and financing. Brindle has only $80,000 of unused overdraft ($600,000 − $520,000). It cannot buy outright, so it would need a new loan, further increasing gearing and probably at a higher rate than the overdraft. Leasing requires no up-front payment and costs $118,000 a year against inflows of $150,000, leaving $32,000 a year positive - the investment pays for itself from month to month.
Technology risk. Battery technology is developing quickly. Buying locks Brindle into five-year-old units that may look outdated, and the residual value of $40,000 is an estimate, not a certainty. Leasing transfers this risk: the supplier replaces failed batteries and carries obsolescence. For a tool-hire business, where customers compare equipment age, this matters commercially.
Cost of maintenance. The lease includes maintenance and battery replacement, whereas the $150,000 net inflow for buying is stated after running costs but not after major component failure. If a battery pack fails outside warranty, the buy option carries an unbudgeted cost.
The finance director's argument. 'You own the asset at the end' is only relevant through the residual value, which is already discounted in the NPV. Ownership also means the asset can be sold or used as security for borrowing. Against that, the owner bears disposal costs and the risk that nobody wants second-hand battery breakers in 2030.
Risks of leasing. A five-year commitment may include termination penalties, mileage or damage charges, and no asset appears on the balance sheet under short-term rental treatment, which can flatter gearing but hide a real obligation.
Judgement. Lease. It is $31,930 cheaper in present value, preserves scarce cash, and matches the asset's life to a fast-changing technology. Brindle should still negotiate a three-year break clause or an option to buy at the end, and should not let the leasing commitment exceed the $150,000 annual inflow.
3. Assess the non-financial factors Brindle should consider before deciding.
Read the worked answer
Customer service and revenue risk. The investment is driven by customers refusing mains units. If Brindle delays, it does not simply forgo $150,000 of inflows - it may lose accounts to competitors hiring battery equipment. The financial appraisal assumes the $150,000 happens; the strategic risk is that it falls.
Supplier reliability. Under a lease, Brindle depends on one supplier for maintenance and battery replacement. If response times are poor, hire revenue stops while the units wait for repair. The contract needs service-level agreements, replacement units and penalty clauses.
Flexibility. Buying 40 units fixes the fleet size. Leasing may allow units to be added or returned as depot demand changes, which suits seasonal construction patterns. Brindle should check whether the lease is a fixed fleet or a flexible one.
Staff and depot implications. Battery units are heavier and need charging infrastructure at depots; Brindle may need to invest in charging points, which is not in either appraisal. Depot staff will need training, and health and safety procedures change.
Reputation and positioning. Being early to battery equipment supports a modern, environmentally credible brand, which may justify a slightly higher cost than the pure NPV suggests. But environmental claims must be accurate, including how the electricity is generated and how batteries are recycled.
Judgement. The financial case for leasing is modest - under $32,000 on a $480,000 decision - so non-financial factors can legitimately tip the balance. The lease is preferable mainly because it protects cash and transfers technology risk, not because it is dramatically cheaper. Brindle should negotiate service guarantees and a break clause before signing.