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Cost evaluation

R

razaas

Member
I need to evaluate and choose the best option from the two alternatives below, using previous leasing cost as base. Hope someone can help, at least to guide me how to set a scenario using data table or some other method. Any help is highly appreciated.


New leasing cost $ 553,456 for 238 units and for a period of 36 months (Alternative I)


New leasing cost $ 653,456 for 238 units and for a period of 48 months (Alternative II)


Previous leasing cost $ 356,566 for 222 units and for a period of 36 months
 
Hi,


You need to do either a NPV or an IRR of the cashflow, it would be more accurate if you have the present price to purchase outright.
 
I'm not sure if it is any more complex than doing the cost per unit per month


Previous 44.62 $/unit/Month

New 1 64.60 $/unit/Month

New 2 57.20 $/unit/Month


You won't need NPV etc unless each option has some different impact on revenue or production output
 
Thanks kchiba & Hui for responding. It is not about cost per unit per month. I need to choose one offer either alt 1 or alt 2. The leasing is on contract basis and if i choose alt 2, which is for 48 months, i need to see is it really cost saving option for me, because if i choose alt 1 for 36 months then i need to obtain new quote from supplier for fourth years and that could be higher than the presently offered price. I tried to take the differnce of rate from previous to new leasing cost for evaluation in case i choose alt 1 as both the previous leasing and new leasing has same period. but what about if i choose alt 2 which is 48 months leasing, will i pay less or more compare to alt 1. hope this makes sense. thanks again.
 
Make up a total cost of each option over 1, 2, 3, ... 11, 12 Years

See what that says


Also if your going to go back to 1 supplier and get them to re-quote based on the first analysis and changed scope, give the other supplier another go as well, they can all sharpen there pencils when required.
 
Thank you very much Hui, whenever I seek help here at Chandoo.org most often you helps me out. I wish if you had elaborated a little more or provided an example, anyway I will try to work out with your guideline. Just a clarification for you, quotes by the supplier are non-negotiable, so re-quote is not possible.


Since I read your article about Data Tables, I kept trying to build a structure that can let me do this cost evaluation using DT but not able to do so yet, that is the reason I posted this here.


Have a great time and thanks so very much.
 
Hi Razaas, both alt 1 and 2 have different term period. And as you put it, if you go for alt 1 you will be exposed to new lease price (higher or lower) come month 36.


In order to compare apples to apples you will need to assess the probably leasing fees over a common time period. So, financially speaking, you will need to assess the 3 years term renegotiate 4 times (now, end of yr 3, end of yr 6 and end of yr 9). Then you also need to assess the total cost for alt 2 over 3 times (now, end of yr 4 and end of yr 8). In that case, both alternative will have a common time period of 12 years (as Hui put it). you can factor in inflation, price adj, etc.


Although in real life situation you may not lease the units over 12 yrs, that's how it is done in a finance homework. ;)
 
Hi Razaas,


There are other questions to be answered, what happens at the end of the lease.


At the end of the 36 month period do you enter into a new lease?, or do you have the option to buy the asset and threfore do not have to lease it for a further period of 12 months, and if ou have the option to purchase at the end of the lease, how much do you pay in each case?
 
Fred, thank you for such easy to understand clarification, this has cleared all doubts, this a great help, thanks again.


kchiba, thanks for your time and comments, answer to your question is, yes i enter into new lease upon expiry of the each leasing period, either 36 months or 48 months. This has to be lease contract only, never will opt for purchase after any lease period expires.


Thanks to all.
 
Razaas,


If there is a new lease after the 36 period, you have to take that into account when you are making a comparison, it is incorrect to compare the 36 month vs the 48 month as you will cash outflow for 48 months irrespective.


So then Hui is correct you just compare the monthly cost over the 48 month period.
 
kchiba, thanks again, yes i know Hui is always correct, with Fred explanation i understood Hui's point and thanks to you, Hui and Fred.
 
Razaas,

Thanx for the sentiment.

My wife may disagree with you though.
 
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