Leasing Agreements --- The Economics Please

I posted this on another forum, but others might not read it, so here goes.

Reading all the discussion about leasing arrangements on this list---whether they are good, bad, or otherwise---is giving me a headache. The answer depends on the details, i.e., the lease terms, compared to the alternative.

As an example (just as an example), suppose that as an O/O with your own authority you bought a truck for $100K in cash, drove it for 5 years, and then sold it for $40K (I'm just making these numbers up as nice and round for an example). Ignoring discounting, for simplicity in making the point, the cost would be $12,000 a year, or $1000 a month. A lease arrangement that charged $1000 a month for the use of the same truck for 5 years and offered no other differences from the O/O arrangement would be EQUIVALENT to the O/O arrangement. If you want to add the time value of money to this, you could add the foregone interest on the $100K under the O/O arrangement as a cost. This would mean that a lease amount of $1000 a month (in this example) would be BETTER than the O/O arrangement. Under the purchase, you have $100K tied up for 5 years earning no interest, and you get $50K back in 5 years. You basically spend $50K for five years with no opportunity to earn interest on the $100K. Under the lease, you would invest your $100K and earn interest while spending your $50K over the same 5 years. Of course, this example could go the other way, depending on the lease terms. My point is simply that there is NOTHING, absolutely NOTHING special about ownership. The truck is an asset that has an opportunity cost, depreciates, and has a scrap value, and that's it. Add it all up, using some notion of the time value of money, and compare it to the lease arrangement to see which is better. It depends.

The issue is the nature of the lease. I gather that leases usually pay only a fraction of the revenue you'd get if you had your own authority, but maybe you couldn't get the same book of business on your own without incurring significant costs? How does that net out? I gather that leases also sometimes pay some of the expenses or offer other discounts or benefits. How does that factor in? All of this has to be worked out.

What I would like to see on this list are some specific terms: lease price, lease life, age of equipment, what happens to the truck when the lease expires, the percentage of revenue offered to the driver, the breakdown of the expenses borne by the company and the driver under the lease arrangement, and the constraints on the driver under the lease. Only with all of these details is is possible to kick around whether a particular lease arrangement is good or bad.

Happy trucking,
Truckee1

 

I am completely prepared to get bashed. Don't much care about that. I am neither defending nor condemning lease arrangements. Perhaps all the lease terms are bad. I really don't know. My point is simply that good terms are "possible." The question is, are the actual terms good or bad.

If what you care about is profit, this is a net present value calculation that compares revenues and expenses, treating the opportunity cost of capital under a truck purchase and the depreciation of the truck as expenses. If you "like" your truck and certain flexibility you can get from owning rather than leasing, well, you can put a value on that if you want. Apart from that, it is purely the present value of revenues minus the present value of costs compared across the cases. My "headache" comes from not seeing any of that analysis on this forum. Instead, what I see are words criticizing leases without numbers. However, you need numbers to make the critique.

 

I am simply asking for the terms. Only then can one option be weighed against another.

 

I didn't say there was no difference in general. I said there was no difference in the example I gave. The issue is: the terms.