Equipment Procurement and Rate of Return

The procurement of large and expensive equipment presents the contractor with some very difficult decisions concerning how such acquisitions should be financed. An important consideration in this regard is the after-tax rate of return that the contractor can expect to receive on his equipment investment. Using discounted cash-flow methods, the rates of return are computed for several procurement alternatives including a true-lease, full-equity purchase, and several instances of financed purchase. Based upon after-tax rates of return, the lease and financed purchase with minimal down payment are shown to be the most desirable procurement alternatives for the acquisition example analyzed. However, other practical considerations are involved and their effect upon the total decision process is discussed.