Calculating returns on simple scenario

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Wildone

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Hi there

In a company, I have a situation where I am looking to buy a crane for 355k which would be depreciated over say 10 years - so a 35k pa charge to the accounts.

If I don't buy the crane I have to pay 99k pa charge for rental of the same unit. (The seller is looking for cash and wants to sell to me rather than I continue rent). If I don't buy the crane then I risk the owner selling to somebody else and I have to rent another unit likely to cost roughly 130k pa.

How do I evaluate the IRR and RONA on this deal, as I am sure it is the right thing to do but need to be able to show convincingly in the numbers.

Am I correct in saying payback period is 355/99 = 3yrs 7 months?

Thanks
 
Best you go talk to your accountant, as you are already in business so likely have one. What you need a second opinion on is not divisional maths but the reliability of your own business' cashflow which will determine whether you can pay back the money is you buy it now
 
Do you have the cash or will you have to finance the deal - if so, what interest rate do you have access to?

Wildone said:
Hi there

In a company, I have a situation where I am looking to buy a crane for 355k which would be depreciated over say 10 years - so a 35k pa charge to the accounts.

If I don't buy the crane I have to pay 99k pa charge for rental of the same unit. (The seller is looking for cash and wants to sell to me rather than I continue rent). If I don't buy the crane then I risk the owner selling to somebody else and I have to rent another unit likely to cost roughly 130k pa.

How do I evaluate the IRR and RONA on this deal, as I am sure it is the right thing to do but need to be able to show convincingly in the numbers.

Am I correct in saying payback period is 355/99 = 3yrs 7 months?

Thanks
Click to expand...
 
Thanks guys. True, I can ask the accountants but was hoping there was a quick calculation that proves the point to buy or not.

We are lucky in that we would not have to borrow or get financing to proceed with this purchase. The opportunity cost would be low.
 
Hi Wildone

This seems pretty clear to me, although it's about 30 years since I had to do a rent vs. buy analysis.

If you have money on deposit at around 3%, you could add around €10,000 to the annual cost of buying the crane outright.

Does renting the crane offer any other advantages over buying?
For example, how much will annual maintenance and insurance cost?
Could the crane go out of date and need to be replaced? .
Or could your business needs change and you may need to get a different type of crane.

Buying offers some advantages too.
It will always be there when you need it and can't be given to some other customer. (Although I wouldn't have thought that there was a shortage of cranes at the moment)

The cashflow is fairly simple. I might divide the 355 cost by the €130 cost of renting it from someone else.

The only real issue for you is whether you should buy this crane or buy some other one.

Brendan
 
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