Fundamentals of Business

Acquisition of fixed assets (Property, Plant and equipment)

Acquisition of fixed assets (Property, Plant and equipment) the following are ways in which capital equipment can be acquired.

Outright Purchase - brand new how outright Purchase Works:
Property, Plant and Equipment purchase are financed by deposits or loans. The operator takes the risk of maintenance, repair and disposal values, but can give day to day responsibilities to a fleet management company, for a fixed monthly fee.

Advantages of a Business Outright Purchase
. Perceived flexibility; with outright purchase, vehicles are bought and sold as needed, without fear of penalty charges.
. Low funding costs: if cash comes from deposits or internal funds.
. Writing down allowances: 25% of the capital cost of the vehicle can be offset against tax each year to a maximum of £3,000 pa.

Outright Purchase - used/Reconditioned
Advantages
. Costs less than brand new.
. May be more readily available.
. Used equipment especially when reconditioned or rebuilt, may have long life and be protected by guarantees or warranties.
. A used machine may be compatible with others already in use, thus reducing the costs of carrying spares.
. It is often possible to inspect used equipment I use under actual working conditions.

Disadvantages of a Business Outright Purchase

Cash flow: significant front-end costs may divert money away from being invested in the company. . There's a minimum opportunity cost - what the money might be expected to earn if invested - of around 3%.
. Exposure: with outright purchase the fleet becomes vulnerable to residual value variations and exceptional maintenance costs. This method of funding needs high calibre expertise to manage well.
. VAT only recoverable if vehicles are used 100% for business.

Summary
Outright purchase is popular with large organisations which can enjoy economies of scale and spread the risk over a large number of vehicles. However, less than 5% of fleets with fewer than 50 vehicles buy outright and that's likely to decrease in future as purchasing loses ground to contract hire. In addition the manufacturer support enjoyed by some of the funding options is not present on outright purchase.