ANALYTICAL RESEARCH REPORT - Your company currently uses e-mail as its primary form of internal communication. This works quite well for most correspondence. However, there are times when you need an even faster response from employees than e-mail allows.

Lastly, while GMD’s financial situation currently looks promising and cash reserves permit the outright purchase of a vehicle, the atmosphere involving the investors is one of urgency to position the company financially for an Initial Public Offering (IPO). As a result, short term contracts with little term long term commitment are becoming more appealing as an IPO date approaches. And until the IPO, large capital expenses are generally being delayed.

Prior to evaluating whether to purchase or lease a vehicle, the first step was to determine which vehicle best suited GMD’s needs. Three options of vehicles were presented to executive management for input: A) a comfortable but non-luxury sedan ideal for employee transportation but with minor cargo capacity, B) a small flatbed truck ideal for significant cargo transportation but less well suited towards transporting more than a few employees, and C) a middle-of-the-road commercial van option that has the flexibility to be modified onsite for cargo transport or employee transportation (by mean of installing/adding additional seats).

Please see Figure 1 for details on the vehicles considered.

Fig. 1. (A title should go here.)

The chief focus of this report is to determine whether leasing or purchasing this vehicle is in the best interest of GMD. The five areas this report will focus on in order to reach a conclusion are: mileage, maintenance, insurance costs for all three vehicles, the “newer car customer impression” effect, and finally, the down payment. (Dennis)

When determining whether to purchase or lease the vehicle, mileage is a primary factor in the consideration. In a lease, a contract is generated that stipulates the maximum number of miles permitted on the vehicle for the term of the lease. In the event the miles are exceeded, there is a per mile fee attached to the overage that can be onerous and expensive, making mileage projections extremely important when leasing. This can be problematic in a business situation where there is only a rough estimate of the miles needed and could, ultimately, drive up the cost of the lease substantially or, if overestimated, waste money on unneeded miles. This is not a significant factor when purchasing.

Anticipated mileage for a twelve month period is currently estimated to be around 15,000 miles per year. Contract terms will need to be negotiated for favorable terms regarding overage costs. The overall term of the lease should reflect a period of five years.

Other than general maintenance brought on by typical wear and tear on the vehicle, mileage is not a concern when purchasing the vehicle. Excessive mileage will result in higher routine maintenance but that event seems unlikely at this point and is therefore neither anticipated nor factored into the final numbers.

GMD is responsible for all maintenance – routine, serious, and otherwise – on the vehicle. Since this will be a new vehicle, it is anticipated that the maintenance will be light (mostly routine) and feature only a few significant dealer-recommended regular maintenance visits. These visits are anticipated to cost $1500-$3000 over a five year period for both lease and purchase options depending on the vehicle.

Though this report does not delve into the deep and murky waters of tax deductions, it is important to recognize that a portion of repairs, maintenance and even gas on the vehicle are tax deductible and the amount that can be deducted varies depending on the whether it is a lease or purchase. According to ehow.com (Leasing Vs. Buying a Car for a Small Business), leasing generally affords the best deduction rates for the short term, whereas purchasing will win out in the long term and for more expensive vehicles. From the article:

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For the period of the lease, the vehicle must remain in the same or similar condition as it was when it was driven off the lot. As such, maintenance and upkeep will be required during the term of the lease. This “same or similar condition” stipulation also applies to any decals, paint schemes or painted on logos GMD management would like to apply. At the end of the lease, these modifications would need to be removed.

As part of a purchase, regular maintenance helps to protect the investment and insure the vehicle reaches the life expectancy asserted by the dealer. The biggest difference between leasing and purchasing in terms of maintenance is the flexibility of customizing the exterior of the vehicle with GMD logos, paint scheme, or other marketing-driven graphics designed to promote the company. Estimated cost is between $500 to $3000 for exterior customization, depending on the vehicle and how elaborate the new design turns out to be.

As part of due diligence, insurance rates were investigated to determine the ongoing expenses for financial (accounting) forecasting purposes. According to Insurancehotline.com ( Buying Vs. Leasing a Car: How it Affects Insurance), “there is no impact on your car insurance rates whether your car is purchased or leased.” Somewhat coincidentally, GMD’s worker’s comp and life insurance provider, Travelers Insurance, also provides commercial vehicle coverage and is willing to offer GMD a slight discount for adding this coverage. With that in mind, the following table reflects the insurance rates for all three of the selected vehicles:

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The vehicle lease stipulates the minimum coverage necessary. Mileage used to obtain the insurance quote is 15,000 miles a year, matching the estimated mileage.

Purchasing the vehicle does not impact insurance, however, the flexibility in insurance options makes purchasing slightly more appealing. This flexibility is derived from the ability to more freely customize or tailor the insurance coverage.

An important aspect that cannot be overlooked is the new car experience and the impression one gets from a new car. A new car creates an impression of comfort, style, power, and business elegance. It cannot be overstated that when GMD entertains clients, a new vehicle will go a long way towards creating that “WOW!” factor that the GMD sales team is trying to achieve. It is for this reason that, whether buying or leasing, new is the clear choice. From an employee and customer perspective, leasing and purchasing appear the same and the overall impression is not diminished either way.

One luxury that leasing provides is the flexibility to return the vehicle after five years and pursue another new vehicle that affords the same positive impression. If maintaining that positive customer impression ranks high this is a very persuasive reason to pursue a lease.

Purchasing a vehicle will also provide that positive new car customer impression but with the caveat that additional maintenance may be required in order to maintain a pristine appearance after a number of years. It should be noted that GMD superficially appears more impressive as a company by outright purchasing the vehicle.

In preparation for this report and next week’s presentation, down payment options have been pre-negotiated below. There are three options in terms of down payments: A) provide the dealer required down payment for the lease, B) provide the minimum down payment for the purchase, or C) provide a down payment above the minimum to lower monthly payments.

Leasing the vehicle typically involves a small down payment accompanied by monthly payments for a predetermined period of time. The vehicle is either returned to the dealer at the end of the lease or arrangements can be made to purchase it. This lease-with-an-option-to-buy flexibility typically results in an overall higher cost to purchase then it would cost to purchase it initially.

Purchasing can be made with either a down payment of a variable amount (typically proportional to the downward influence it has on the interest rate) and monthly payments until the balance has been paid off, or the vehicle can be purchased outright. An outright purchase reduces the total cost of the vehicle by eliminating the interest but the rather significant cash outlay makes this difficult in most situations. The Chief Financial Officer (CFO), Mr. Oblivious, has indicated that GMD’s cash reserves could permit the outright purchase of the vehicle. He has also expressed concern regarding the timing of the purchase in light of an imminent IPO.

The vehicle options were discussed in a round table meeting on April 1, 2015 with executives and stake-holder managers. The decision reached in that meeting was to go with Option C, the Ford Transit Wagon XLT, as this was the only option that permitted the sort of flexibility and customizability to meet our changing/evolving needs of the day.

After negotiating with the dealer for the model with the specifications and accessories the stake-holders identified, the cost of the Transit Wagon XLT is approximately $41,000.00 ($41K). Note: This figure includes taxes, license, and registration fees and contains a margin of error of +/- $1000 to account for unforeseen costs (i.e. post purchase dealer modifications) and the possibility that additional haggling with the dealer may reduce the cost further. However, as of now, $41K represents the purchase price of the vehicle. The leasing price would equal $38,850.00, which is the cost of the vehicle minus tax and licensing.

A review of the pros and cons in each of the evaluated categories was recently conducted with executive management in preparation for a presentation to the board of directors. Executives found that in the categories of mileage, maintenance, insurance, and down payment that buying was the more attractive option. The only category where leasing was more attractive was in newer car customer impression and this was simply because the lease option permitted a regular “refresh” of the vehicle. In a nutshell, newer always impresses more than older.

The final piece to evaluate was the financial numbers and what they netted. In the chart below, the numbers as described by Calculator.Net ( Auto Loan Calculator) show that should GMD purchase the vehicle at the end of the lease the final cost would be significantly more. Please refer to Figure 2 for the final numbers analysis.

Fig. 2. (Missing Title)

These numbers can be broken down further and become significantly enlightening when observed categorically. The charts below in Figure 3 provide greater insight into where money could potentially be wasted.

Fig. 3.

works cited

Dennis, Brandon, Leasing Vs. Buying a Car for a Small Business. Available from: <http://www.ehow.com/about_7491914_leasing-buying-car-small-business.html>. [16 July 2015]