A breakeven analysis should be performed for both purchase and lease options to help in the decision-making process. In this process, the organization determines when it neither experiences income or a loss in terms of the number of units produced by the equipment. Fixed costs, variable costs, and planned production volume levels are used to make this computation (more details on breakeven can be found in the Management portion of this program).

Issues relative to the payback period length should also be evaluated. This is found by determining how long it will take the organization to recover the amount it cost the business to purchase or lease the equipment. For example, if the equipment will become obsolete in a relatively short period of time, it may be more cost-effective for the organization to consider a lease option rather than a purchase option.

A comparative analysis form may be used when making the purchase or lease decision. This form lists the vendor or manufacturer and the comparable factors involved. Here is an example of an abbreviated comparative analysis form:

The average rate of return may also be determined. In this method, the average savings to be realized from the equipment is divided by the average amount of the investment. An investment may be considered reasonable if the cost to purchase the equipment is the same or less than the company’s current financing cost (for example, if the organization pays five percent interest to finance purchases and the company’s finance cost is five percent or higher).