Interview with Ingemar Lanevi, Treasurer, NetApp
Transcript: How do renewals and buyouts affect your analysis? |
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Interviewer: And let’s just say that you return 80 percent of it and 20 percent of it you end up renewing and buying out or just buying out. Now, people will use that as an argument against leasing. But, you know, there’s still the cash-flow benefit if you don’t capture that economic benefit.
Ingemar Lanevi: Correct. Correct.
Interviewer: Even if you pay 100 percent, even maybe 101 or 102 percent of that original cost, you still get the cash-flow benefit.
Ingemar Lanevi: So, here’s another way of thinking about that. And we’ve actually seen a couple of deals with one vendor in particular right now that is offering this, which is a three-year dollar buyout lease structure at 0 percent financing.
OK, so, if you think about that, who in their right mind would not take that deal? Versus, again, let’s say it’s a million dollars. Here’s your options: Pay me a million dollars today to get this equipment and use it forever or how long you want. Or, pay me a million dollars split over three years and use the equipment for three years and after three years you pay me a dollar and you can keep on using it for as long as you want.
Anybody who understands anything about time value of money would argue that the 0 percent financing lease deal over three years is by far a better alternative than a cash deal up front, due to the cash flow.
I don’t have to spend a million dollars up front and lose the opportunity value of being able to take that one million dollars and do something totally different with it; i.e., buy back my stock and generate more value for the shareholder as opposed to spending it on buying an asset that I know is going to depreciate in value.
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