Comparing Investments

Comparing InvestmentsUsing DCF to help with Management Decisions

The ScenarioYou run an FM Department.For maintenance and cleaning of parts of the building, you need to use a hydraulic lift (aka cherry picker)

Is it better to buy or rent?

What does it Cost?

Hire Costs, say 500 Crowns per week

Purchase Price, say 100,500 Crowns

Other Costs:

Insurance, Maintenance, Fuel.

Other CostsFuel diesel or electricity. Same whether hire or rent.Maintenance, if we rent, no maintenance costs to us. If we buy, say 500 Crowns per yearInsurance, if we rent, no insurance costs to us. If we buy, say 200 Crowns per year

Time & LifetimeHow much will we use it?Say 1 week per month

How long will it last?Say 20 years.

COMPOUND INTEREST TABLES5PER CENTYrsAmt of 1(Amount to which a capital sum will accrue)PV of 1(Present Value of a Capital Sum)Amt of 1 pa(Amount to which an income stream will accrue at a given rate)PV of 1 pa(Present Value of a income or expenditure stream)Annual Sinking Fund11.0500000.9523811.0000000.9523811.00000021.1025000.9070292.0500001.8594100.48780531.1576250.8638383.1525002.7232480.31720941.2155060.8227024.3101253.5459510.23201251.2762820.7835265.5256314.3294770.18097561.3400960.7462156.8019135.0756920.14701771.4071000.7106818.1420085.7863730.12282081.4774550.6768399.5491096.4632130.10472291.5513280.64460911.0265647.1078220.090690101.6288950.61391312.5778937.7217350.079505111.7103390.58467914.2067878.3064140.070389121.7958560.55683715.9171278.8632520.062825131.8856490.53032117.7129839.3935730.056456141.9799320.50506819.5986329.8986410.051024152.0789280.48101721.57856410.3796580.046342162.1828750.45811223.65749210.8377700.042270172.2920180.43629725.84036611.2740660.038699182.4066190.41552128.13238511.6895870.035546192.5269500.39573430.53900412.0853210.032745202.6532980.37688933.06595412.4622100.030243212.7859630.35894235.71925212.8211530.027996222.9252610.34185038.50521413.1630030.025971233.0715240.32557141.43047513.4885740.024137243.2251000.31006844.50199913.7986420.022471253.3863550.29530347.72709914.0939450.020952263.5556730.28124151.11345414.3751850.019564273.7334560.26784854.66912614.6430340.018292283.9201290.25509458.40258314.8981270.017123294.1161360.24294662.32271215.1410740.016046304.3219420.23137766.43884815.3724510.015051355.5160150.18129090.32030716.3741940.011072407.0399890.142046120.79977417.1590860.008278458.9850080.111297159.70015617.7740700.0062625011.4674000.087204209.34799618.2559250.0047775514.6356310.068326272.71261818.6334720.0036676018.6791860.053536353.58371818.9292900.0028286523.8399010.041946456.79801119.1610700.0021897030.4264260.032866588.52851119.3426770.0016997538.8326860.025752756.65371819.4849700.0013228049.5614410.020177971.22882119.5964600.0010308563.2543530.0158091245.08706919.6838160.0008039080.7303650.0123871594.60730119.7522620.00062795103.0346760.0097052040.69352919.8058910.000490100131.5012580.0076042610.02515719.8479100.000383

6

Appraisal PurchasePurchaseLifetime20yearsCapital CostK100,500InsuranceK200paMaintenanceK500paAnnualCostsK700paPV 1 pa20years @5.00%12.462K8,723NPVK109,223SAYK110,000

7

Appraisal - RentRentLifetimeUnlimitedyearsHire CostK500pw12weeks paK6,000paPV 1 paIn perpetuity@5.00%19.84NPVK119,040Say K120,000

8

Further ConsiderationsWhat happens after 20 years? Need to buy a new one.Annual Sinking Fund to recover K100,500 in 20 years @ 5% =K100,500 * 0.04632 = K4,655 paMight be able to sell the old cherry picker, say K2,000, in 20 years time

PurchaseLifetime20yearsCapital CostK100,500InsuranceK200paMaintenanceK500paSinking FundK4,655paAnnualCostsK5,355paPV 1 pa20years @5.00%12.462K66,734NPVK167,234AddRe-sale ValueK2,000 Deferred20years @5.00%0.37689 K754NPVK167,988SAYK170,000

More ConsiderationsWhat if we are wrong about how much we will use the Cherry Picker?What if we use it more than 1 week in 4?Properties getting older, need more maintenanceBusiness expanding, more buildings.

RentLifetimeUnlimitedyearsHire CostK500pw18weeks paK9,000paPV 1 paIn perpetuity@5.00%19.84NPVK178,560Say K180,000

Allowing for different circumstancesCreate a spreadsheet

Can apply different models

Different costs

Different timescales

Different rates