Lease Versus Purchase

Editor's Note: While this article focuses on a college environment, the information is applicable to school systems as well. Introduction Since the early 1980's, computer technology in universities has become an integral part of the instructional and administrative functions of the school environment. The
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Editor's Note: While this article focuses on a college environment, the information is applicable to school systems as well. Introduction Since the early 1980's, computer technology in universities has become an integral part of the instructional and administrative functions of the school environment. The

Editor's Note: While this article focuses on a college environment, the information is applicable to school systems as well.


Since the early 1980's, computer technology in universities has become an integral part of the instructional and administrative functions of the school environment. The traditional method of purchasing equipment through capital expenditures worked well in the days when overhead projectors, filmstrip projectors, and record players were the mainstay in every classroom. Today, however, software programs require constant upgrades in computer capacity and speed to meet the rapidly growing knowledge base and applications available through a simple click of the mouse.

Addressing the financial demand for technology in colleges has two major challenges. The first is the cost of hardware and the accompanying need for periodic upgrades. The second is the strain on existing college budgets to meet the capital outlay demands of a rapidly growing student population and the strain on current expense funds to meet the programmatic needs of increasingly diverse student populations. Both of these challenges stand to only get worse. University administrators and boards of education continually struggle to set priorities within limited budgets while providing the highest level of educational opportunity possible.

Colleges, like businesses, must begin to analyze the efficiency of purchasing versus leasing technology equipment. The life span of the average computer, defined by capacity and ability to run increasingly sophisticated programs and receive electronic transmissions is hard to determine. While some levels of schooling can use older, less sophisticated computers other levels must address society's demand of preparing the future work force. Therefore, obsolescence of technology equipment must be considered a problem as important as outdated textbooks.

Cost Benefit Analysis - Equipment Leasing

Leasing is one of the fastest-growing ways of financing equipment in business today. Colleges could benefit by taking a closer look at the advantages and disadvantages of leasing compared to purchasing.

Leasing technology purchases can free up money for other projects, programs, or personnel needs. Administrators can also make more up-to-date technology available to students. By contrast, purchasing an entire system in a lump sum calls for fewer computers due to limited funds.

Computer literacy changes rapidly based on advances in technology. By negotiating a sound lease contract agreement, administrators can exchange older machines for more up-to-date models at the end of the lease period.

While definite financial advantages exist in leasing technology equipment, certain disadvantages also exist. A lease is similar to a loan in that interest is paid to the lessor. Table 1 illustrates a sample leasing agreement offered by XYZ Inc.

Based on a $2,200 Pentium Machine
$1 buyout at the end of the lease

12-month lease

Monthly payment/ Total payment

24-month lease interest rate

Monthly payment/ Total payment

36-month lease interest rate

Monthly payment/ Total payment







Universities that wish to lease on a three-year basis could end up paying $3,010 for a $2,200 machine because of the interest paid. If studied on a larger scale, a college system that takes the model presented in Table 1 and purchases 100 machines would pay approximately $81,000 more than if they had purchased the machines initially. Table 2 explains the cost involved in leasing 100 machines.

School System XYZ Purchases 100 Machines Using the Above Model
Based on a 36 month cycle

Type of Purchase

Number of Machines

Cost per Machine

Interest Rate

Total Cost

Capital Outlay










Another point is the buyout terms. One of two contractual agreements is usually arranged between the lease and leaser. The first is the $1 buyout. In this scenario the school may purchase the equipment for $1 upon the expiration of the lease agreement. The second scenario is a "fair market value" calculation performed by the leasing company. A monetary value is placed on the equipment based on the depreciation or value of the equipment upon the termination of the lease. Administrators should be very cost conscious with the second contractual agreement. The "fair market value" agreement most of the time leaves the schools at the mercy of a leasing company to place value on the equipment. In either case special considerations should be taken when reviewing this part of the lease.

Another disadvantage that exists in some lease agreements involves the "you break it, you buy it" clause. Computers are delicate machines. Placing computers in the hands of students increases maintenance costs. Most educational leaders generally misunderstand this common practice. Therefore, administrators need to remember that if computers are leased, money must be budgeted for maintenance.

One final disadvantage to leasing equipment is the addition of another layer of administrative overhead. In order to turn a computer in for a newer model; all parts of the machines must be accounted for at the end of the lease. Thus, a tracking system must be in place for proper accounting. A school system can be penalized for inaccurate accounting for all computer parts at the end of the contract.

What are the choices in terms of efficiency?

To answer the question of efficiency in technology purchases, the administrator must ask three basic questions: (1) how desperately are computer access points needed? (2) What types of software applications are running? and (3) What amount of dollars for technology are available through existing funds?

How desperately are computer access points needed?

The question is first examined by taking an inventory of the amount of technology that already exists in the schools. If the college has very little technology, then drastic measures may be in order to lower the computer/student ratio. Leasing computers is the most cost-effective measure to address computer/student ratio on a short-term basis.

What types of software applications are running in schools?

The first step in answering this question is to inventory software applications currently in use. The software applications will determine what types of computers to purchase. Every classroom does not need the same applications; therefore, every classroom does not need the same level of hardware or computerized system. For example, a typing lab does not need the fastest, latest model computer. On the other hand, a computer-aided design classroom must have the best machines to handle the requirements needed to run the software. In studying software requirements, colleges may find leasing some computers and purchasing others as viable financial approaches based on need. Short-term leases may be the better approach for computers needed to run the latest software.

What amount of money for technology is available through existing funds?

Financially, whether a university leases or purchases computer technology with capital expenditures may depend on the funding sources of technology within the college's budget. A lease contract requires payments to be made on established terms. Thus, a set amount must be established and maintained in the continuing budget from one year to the next. Often state and or grant support may fluctuate from year to year. Therefore, the college may be faced with supplementing dollars for lease agreements from local funds. If a university depends on nonrecurring funds for technology needs, purchasing computers via capital outlay financial practices is the wise method of procurement.


The demands upon colleges to acquire, update, and maintain technology for instructional and administrative uses are going to only increase in the years to come. Dollars from state and local funds will not increase at a rate equal to the demand. Grants, awards, business and university partnerships, and public campaigns will not fill the gap between available funds and immediate technology needs. Student accountability programs and emphasis upon equity in instructional programs and support will continue to emphasize the need for increasing numbers of students to have computer access.

While many universities have established local-area-networks, others have not. More and more systems will be examining the feasibility of establishing wide-area-networks to increase student, teacher, and administrator access to knowledge and learning support. Determining current availability, usage, the degree of need, and urgency in acquisition are first steps for school districts to take in conducting a technology needs assessment. Comparing needs to existing or projected funding will allow educational leaders to decide whether leasing computers or equipment as compared to purchasing necessary items is the better approach to providing quality education.

Email: Tim Wilson



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