Lease-Buy Planning Decisions

Paul A. Weekes, John C. Chambers and Satinder K. Mullick
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Paul A. Weekes: Cuno Division, American Machine & Foundry Company, Meriden, Connecticut
John C. Chambers: Corning Glass Works, Corning, New York
Satinder K. Mullick: Corning Glass Works, Corning, New York

Management Science, 1969, vol. 15, issue 6, B295-B307

Abstract: A company with a long standing practice of leasing equipment may amass, over a period of time, a complicated structure of leasing arrangements, both long-term and short-term. Due to changes in costs of leasing, purchase prices, etc., there should be frequent evaluations of whether the existing strategy is optimal. The usual approach is to perform a "macro-steady-state" analysis, where cash flows and/or return-on-investment calculations are performed. However, some macro-analyses indicate only which choice is preferable and do not take into account either the possibility of a mixed strategy (own some and lease some) or implementation problems and the resulting costs that occur when converting from one system to another. Furthermore, if there is to be a conversion from leased to owned equipment, additional burdens will be placed on the maintenance department. An overall planning model has been developed which yields an optimum conversion schedule and the cost of conversion. The optimal solution can be updated over time if there are changes in leasing and purchasing costs, taxes, interest rate and maintenance costs. Various assumptions are discussed, along with the inputs, the model structure, and the use of a matrix generator. The specific example considered is the problem relating to leasing or purchasing railroad equipment for transporting finished products to the customer.

Date: 1969
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