When evaluating the attractiveness of hiring plant and equipment in New South Wales (NSW), Australia, using the discounted cash flow (DCF) method, it’s essential to consider both the cash flows generated by the equipment and the tax implications of hiring versus purchasing.
Cash Flows from Hiring
Hiring plant and equipment involves periodic rental payments instead of a large upfront capital outlay. This can significantly improve cash flow, particularly for businesses that prefer to conserve capital or lack the funds for a significant purchase. The rental payments are generally treated as operating expenses, fully deductible in the year they are incurred, which can reduce taxable income and, consequently, the tax liability.
Tax Write-Offs
In Australia, the tax treatment of hired versus purchased equipment is different. When equipment is hired, the entire rental payment is typically deductible as an expense, leading to immediate tax benefits. Conversely, purchasing equipment requires the business to capitalize the cost and then depreciate it over the asset’s useful life. While depreciation also provides tax benefits, these are spread over several years rather than being immediate.
The government often offers specific tax incentives for capital purchases, such as the instant asset write-off scheme, where businesses can immediately deduct the full cost of eligible assets. However, these incentives apply only to outright purchases and not to hired equipment.
Discounted Cash Flow Analysis
When applying DCF analysis to hiring plant and equipment, the focus is on the net cash flows after accounting for the rental payments and the tax deductions. The DCF model discounts these future cash flows to their present value using the company’s cost of capital. Hiring plant and equipment can be attractive if the present value of the cost savings (including tax benefits) outweighs the benefits of ownership, such as asset depreciation and potential capital gains.
Conclusion
In NSW, the attractiveness of hiring plant and equipment from a DCF perspective depends on the specific financial situation of the business. For businesses prioritizing immediate cash flow and benefiting from tax deductions, hiring can be an advantageous option, especially in the context of maximizing after-tax cash flows. However, the decision should be evaluated against potential long-term benefits of ownership, considering depreciation and possible appreciation of the asset’s value.
