Renting and Leasing

1
Renting and Leasing

• Rent
• payment for use of plant belonging to others
• usually paid on a regular basis
• ownership remains with lender
• Lease
• can simply be rental agreement with fixed period
  and other terms and conditions
• termination, escalation

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
2
Leasing and Hire Purchase

• Leases may be more complex, especially with
  machinery and vehicles
• include a residual to allow the transfer of
  ownership at the end of the lease period
• must find residual, or re-lease equipment
• Hire Purchase
• plant is in assets of user
• depreciation appears in books of user
• interest and capital paid at an agreed rate
• only interest is an expense in PL

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
3
Novated Leases

• Novation the substitution of a new obligation
  for an old one by mutual agreement between the
  parties
• especially of one debtor or creditor with another
• Novated Leases involve a third party that
  provides the funds
• becoming more common for individuals through
  salary sacrificing/packaging

4
Interest

• Cost of borrowing money
• interest (and capital) paid regularly
• simple
• interest charged on remaining principal
• compound
• interest paid on outstanding interest and
  principal if previous instalment not paid
• flat
• interest charged on original borrowing

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
5
Interest

• Simple interest i P
• where i is the (annual) interest rate P is
  the principle still to be paid back
• Flat interest i Po n
• where Po is the original principle n is the
  number of years of the loan
• (annual) repayments are calculated as (1 i
  n)Po / n

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
6
Interest

• Compound interest (1 i)n - 1P
• applies where no payment is made during life of
  loan so P Po
• Compounding over periods other than annually
• let I be interest rate for an interval 1/N years
• I (1 i)1/N - 1
• I ? i/N

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
7
Depreciation

• Three view points may be adopted
• only a proportion of a capital asset is required
  to be paid for in any one year
• as a machine grows older it will decline in its
  asset value
• the loss of value of an asset is an allowable
  deduction for taxation purposes
• this represents a non-cash income
• writing-down allowance

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
8
Depreciation

• Can represent the amount that a machine must be
  expected to pay for itself in any one year, or
  its present resale value which is reduced due to
  wear and tear or obsolescence
• Sometimes it is suggested that depreciation is
  setting aside sums of money to have enough money
  at the end of the assets life to replace it.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering