Don’t Be Left in the Dark When Financing Your Generator | Merchant West

Articles | Don’t Be Left in the Dark When Financing Your Generator

With load-shedding rearing its ugly head once again and the chronic unreliability of South Africa’s power supply, buying a generator is a serious consideration for many South African businesses. Many will, without question, opt for the lowest discount rate option usually offered on an Instalment Sale through commercial banks. However, the advantage of an asset rental or rent-to-own option over your standard instalment sale agreement lies in the ability to accelerate the asset write down and subsequent tax deductions on your balance sheet.

Simply put, if you buy an asset using cash or through an instalment sale, that asset will stay on your balance sheet for the entirety of its write-off period as set out by The Schedule of Wear and Tear/ Depreciation Allowances issued by SARS.

For example, the full acquisition cost of a standby generator qualifies for a 15-year write-off period while a portable generator is a 5-year write-down. These are important factors to be considered when presented with a “Buy vs Lease” decision. As shown in the below example, financing this equipment on a rental basis would yield the highest Net Present Value when compared to cash or ISA option, even when using a higher discount rate for the rental option.

Thus, opting for an operating lease allows you the opportunity to accelerate your income tax claims and improve your cost of acquisition; allowing your business to realise the real benefits of financing your assets.

 

  Discount rate used 11%                                
                                     
Option1 Generators - Cash option                                  
  Yrs 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15  
  Cash price    -2 236 000                                
  Tax saving - W&T     41 739    41 739         41 739          41 739         41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739  
  (Interpretation note - Standby Generators)                                  
      -2 236 000    41 739     41 739     41 739          41 739          41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739  
  PV factor           1,0000     0,9009     0,8116      0,7312          0,6587          0,5935       0,5346       0,4817       0,4339       0,3909       0,3522       0,3173       0,2858       0,2575       0,2320       0,2090  
      -2 236 000     37 602     33 875      30 519          27 493           24 772       22 313       20 106       18 110       16 316       14 700       13 244       11 929       10 748          9 683          8 723  
                                     
  NPV   -1 935 866                                
  Check NPV   -2 236 000          37 602            33 876           30 519          27 495              24 770       22 315       20 104       18 112       16 317       14 700       13 243       11 931       10 748          9 683          8 724     -1 935 863
                                     
                                     
Option2 Generators - Bank Finance option (assume 5yrs and assume at prime + 1.5)                              
  Yrs 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15  
                                     
  Instalments - Cash        -553 868        -553 868       -553 868      -553 868         -553 868                      
  Tax saving - 100% deductable interest   51 841 40 068 29 927 18 946 6 882                      
  Tax saving - W&T            41 739            41 739           41 739          41 739              41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739  
                                     
                           -        -460 288        -472 061       -482 202      -493 184         -505 247       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739       41 739  
  PV factor           1,0000          0,9009            0,8116           0,7312          0,6587             0,5935       0,5346       0,4817       0,4339       0,3909       0,3522       0,3173       0,2858       0,2575       0,2320       0,2090  
                           -        -414 673        -383 125       -352 586      -324 860         -299 864       22 313       20 106       18 110       16 316       14 700       13 244       11 929       10 748          9 683          8 723  
                                     
  NPV   -1 629 236                                
  Check NPV                        -        -414 674        -383 135       -352 582      -324 875         -299 840       22 315       20 104       18 112       16 317       14 700       13 243       11 931       10 748          9 683          8 724     -1 629 230
                                     
                                     
Option3 Generators - Rental option (5yrs and take prime +3.5)                                  
  Yrs 0 1 2 3 4 5                      
                                     
  Rental pmts - Cash   -571 903        -571 903       -571 903      -571 903         -571 903                      
  Tax saving - 100% deductable expense         160 133         160 133        160 133       160 133           160 133                      
                                     
                           -        -411 770        -411 770       -411 770      -411 770         -411 770                      
  PV factor           1,0000          0,9009            0,8116           0,7312          0,6587             0,5935                      
                           -        -370 964        -334 193       -301 086      -271 233         -244 386                      
                                     
  NPV   -1 521 861                                
  Check NPV                        -        -370 964        -334 202       -301 083      -271 246         -244 365                         -1 521 860

 

 Conclusion:

The best option would be to finance the Generators on a rental basis as the NPV under option 3 is higher (less negative) than Option 1 and 2

Furthermore, Option 1 has no spare cash to invest and the NPV will further be affected due to the opportunity cost of capital. However, with the financing option, cash will be available to generate a positive return on investment (inflow).

 

Wear-And-Tear or Depreciation Allowances by SARS: https://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-IN-2012-47%20-%20Wear%20And%20Tear%20Depreciation%20Allowance.pdf