Verity Insurance: Own the Fleet or Rent It?
Verity Insurance operates in insurance across US. It needs additional equipment for the next 5 years and has two offers on the table.
Buy: $42 M up front, depreciated straight-line over 5 years, with an expected resale value of about 30% of cost at the end.
Lease: $10.3 M per year for 5 years, fully deductible, with the lessor carrying maintenance and taking the asset back at the end.
The company's discount rate is 9.3% and its effective tax rate is 23%. Current utilisation of the existing equivalent fleet runs at 79%, and the operations director expects demand in this segment to be lumpy.
buy option
- purchase price m
- 42
- residual value m
- 12.6
- depreciation years
- 5
- residual value pct
- 30
assumptions
- discount rate pct
- 9.3
- effective tax rate pct
- 23
- current fleet utilisation pct
- 79
lease option
- term years
- 5
- annual payment m
- 10.3
- maintenance included
- true
Advise the CFO. Your answer should provide:
- Analysis — the present value of each option, on a comparable after-tax basis.
- Risks — utilisation, obsolescence, and what the balance sheet treatment changes.
- Recommendation — lease or buy, with the number, and the condition that would reverse it.
State any assumptions you make.
80 points, 60% to pass.
- recommendation20
- market analysis15
- risk assessment20
- financial analysis25
Reveal suggested structure
Discount both after-tax cash flow streams over the same horizon, include depreciation tax shield and residual on the buy side, then test against utilisation.