Compare the same period of use
Choose the date you expect to replace or sell the equipment. For a cash purchase, count the price and running costs, then subtract estimated sale proceeds. For finance, count the deposit, repayments, running costs and any debt payout at sale. Do not add the entire purchase price again: the loan repayments already repay the financed portion.
Rental needs its own running-cost allowance. Maintenance included in rent should not appear twice. Check minimum hire periods, transport, return charges and usage limits before treating a rental quote as a complete alternative.
Worked example: cost over 36 months
Assume a $120,000 machine, sold after 36 months for $65,000. Financing uses a $20,000 deposit, $100,000 principal, 8.5% nominal annual interest, 60 monthly repayments and a $24,000 balloon at maturity. Owner running costs are $600 monthly. Equivalent rent is assumed to be $2,900 plus $200 monthly costs. These are hypothetical pre-tax inputs, excluding lender fees.
| 36-month cash item | Buy with cash | Buy with finance | Rent |
|---|---|---|---|
| Upfront cash | $120,000.00 | $20,000.00 | $0.00 |
| Regular monthly purchase/finance/rent payment | $0.00 | $1,729.26 | $2,900.00 |
| Additional monthly running cost | $600.00 | $600.00 | $200.00 |
| Estimated debt payout at sale | $0.00 | $58,302.79 | $0.00 |
| Assumed sale proceeds | $65,000.00 | $65,000.00 | $0.00 |
| Total cash cost over 36 months | $76,600.00 | $97,156.02 | $111,600.00 |
Swipe or scroll the table sideways to see every column.
The loan has 24 months remaining when the machine is sold, so its estimated balance must be settled from the sale or other cash. The mathematical payout shown is not a lender payout quote. All three totals end after 36 months of use; tax, opportunity cost and unlisted charges are outside the comparison.
Turn the monthly commitment into billable hours
Subtract variable costs per paid hour from revenue per paid hour. That contribution pays the regular finance instalment and other fixed cash commitments. Divide those monthly commitments by hourly contribution to find cash break-even hours. Divide again by available monthly hours to express the result as utilisation.
Count paid work rather than engine hours alone. Travel, maintenance and idle time can consume capacity without earning the assumed hourly rate. If hourly contribution is zero or negative, extra hours cannot make a positive contribution to fixed commitments. If break-even exceeds available hours, the current assumptions do not support the commitment.
How many paid hours support the regular commitment?
For the financed machine, use the monthly repayment of about $1,729.26 plus $600 of monthly owner costs. Assume contribution of $100 per billable hour after variable hourly costs and 160 available hours a month.
| Measure | Calculation | Result |
|---|---|---|
| Regular monthly commitment | $1,729.26 repayment + $600 owner costs | $2,329.26 |
| Cash break-even billable hours | $2,329.26 ÷ $100 per hour | About 23.3 hours |
| Break-even utilisation | 23.3 hours before rounding ÷ 160 hours | About 14.6% |
| If contribution falls to $80 per hour | $2,329.26 ÷ $80 | About 29.1 hours |
| Utilisation at $80 contribution | 29.1 hours before rounding ÷ 160 hours | About 18.2% |
Swipe or scroll the table sideways to see every column.
The regular-commitment calculation does not fund the $20,000 deposit or the later balloon automatically. If available hours fall because of downtime, use the lower capacity; if actual paid hours fall below break-even, those regular commitments are not covered by the assumed contribution.
Keep cash cost and cash capacity together
A financing option can have a manageable monthly break-even while still requiring substantial cash upfront or at sale. A balloon reduces regular principal repayments but leaves a later amount to fund. An early payout estimate is a mathematical balance; lender fees or other contractual payout amounts may change it.
Test a quiet month, lower resale proceeds and repair downtime. These pre-tax cash scenarios do not measure accounting profit, tax savings or investment return.
What to prepare
- Choose a realistic sale date.
- Separate rent inclusions from additional costs.
- Clarify quoted finance and payout terms.
- Estimate utilisation from billable-hour records.
- Plan upfront cash and balloon funding.
- Test quiet months and lower resale.
Common questions
Does the lowest total cash cost identify the best option?
It identifies the lowest result under the assumptions entered. Cash retained for other business needs, access to replacement equipment and operational flexibility also affect the decision.
Should operator wages be fixed or variable?
Use the way you actually pay them. Regular wages may be fixed commitments; labour paid only for additional work may be variable. Split mixed costs and enter each component once.
What happens if the finance term ends before I sell?
Include the balloon at maturity, stop loan repayments after that date, and continue ownership running costs until sale. Do not extend repayments simply to match the comparison period.
General information only. Product terms and availability vary. Check the actual proposal and obtain advice appropriate to your circumstances.