LEASE VERSUS PURCHASE OF A CENTER-PIVOT IRRIGATION SYSTEM: A GEORGIA EXAMPLE

Use of irrigation has been increasing rapidly in sideration to purchasing the system if no finanthe Southeast. For example, irrigated acreage in cial constraints exist. Differences in the financGeorgia increased by 20 percent in 1980, to 0.988 ing method will affect cash outflows. Analysis of million acres (Skinner, 1981), and increased 16.5 lease or purchase is therefore a preliminary step percent in the previous year (Skinner, 1980). Re- to the overall decision to invest in an irrigation search has been completed on the costs and prof- system. Alternatively, the lease-versus-purchase its of irrigated crops (Tew and Musser). How- decision would be of interest to a farmer who has ever, methods of financing irrigation equipment decided to use irrigation, but is undecided on have received limited attention. One method of financing methods. This section first considers acquiring use of equipment and financing in ag- the application of the concept of net present riculture is leasing. Previous studies (Hopkin; value (NPV) to this decision and then considers Lins; Willett and Penland; Willett) provide in- other factors that require consideration in the sight into the lease-versus-purchase financing analysis. question. All the authors found the present value Standard analysis of leasing versus purchasing of after-tax costs for purchasing less than the utilizes the concepts of NPV that were developed costs for leasing. Hopkin and Willett and Penland for capital budgeting (Brigham; Barry et al.). The used straight line depreciation and did not con- basic input for this analysis is incremental aftersider accelerated depreciation. The investment tax cash flows over the planning horizon. In tax credit (ITC) is given to lessees in Arizona financing decisions for irrigation systems, many (Willett and Penland), whereas in the Southeast, costs and revenues associated with the use of the lessor retains the ITC. Lins analyzes term irrigation are invariant and need not be considloans that are shorter than is common for irriga- ered. Examples include increased revenues from tion equipment loans in the Southeast. Willet higher yields; inputs associated with intensified provides the most definitive study; however, he crop production under irrigation; labor, fuel, and and the others assume a stable price environ- repairs to operate the irrigation system. Therement. Finally, these studies do not consider the fore, the NPV calculations must consider only financing alternatives for the higher leverage the cash ownership costs, the lease charge, and (debt/total assets) farmer. the income tax effects of the differences in cash This paper analyzes the cost of lease and pur- flows. Since almost all of these cash flows are chase options for irrigation equipment within dif- negative, the NPV most likely will be negative. ferent scenarios of economic parameters. Two For convenience, all of the formulas are multicriteria are used to examine these options: mini- plied by minus one and the criterion is to minimum after-tax discounted cash outflows, and mize -NPV rather than maximize NPV. Alternaminimum equity capital requirements. The sec- tively, this approach can be thought of as ond criterion is added to accommodate situations minimizing the present value of costs or cash outin which equity capital is limited for the farm flows. firm. However, primary reliance is placed on The formula for NPV of leasing (NPVL) is: standard discounted net cash outflows. Data obtained in Georgia are used to illustrate the meth- (1) NPVL= L(1-d) + odology.