Digital Equipment Lease Review and Audit

office photocopierA client had intended to release the existing equipment so they could take advantage of the IRS Section 179 Tax deduction prior to the end of 2013. We suggested that it was appropriate to do a review and audit of their digital equipment leases for usage and contract compliance prior to releasing the equipment.

Upon reading and auditing the existing lease contract, it was discovered that the client was being charged an annual 15% increase for maintenance on its entire lease payment. This included the principal payments and interest for the equipment in addition to the maintenance portion. The client was under the impression they were only paying the increases on the maintenance portion.

We then reconciled the monthly invoices for over/under usage. It was at this point that we discovered that the client in the past quarter had increased the color imprint usage by 110% over the prior 10 quarters – meaning they had 6,200 color imprints for 28 months and in 3 months during the September 2013 quarter they had 6,700 imprints costing them a $430.00 additional expense above there allotted 1650 imprints. In a review of best practices for this client – they did not have any mechanism to monitor their daily usage to determine if there was normal usage on a daily, weekly or monthly basis. A best practice review system is now in place.

Once the audit was completed and their usage was determined, we then examined the proposal from their existing vendor for the release of their existing equipment. Keeping in mind that they were 4 months from completing their 36-month lease. The total payments for this first lease were $14,567.00 and there would be a fair market value purchase at the end that was just less than $2,500. The new proposal from their existing vendor was for a $1 buy-out lease for the existing equipment costing them $18,371 over the next 36-months. Because the client valued the existing vendor relationship we first approached them to discuss their proposal and to understand the pricing. After our negotiations, they proposed a new flat pricing option dropping the cost to $14,580 over the 36-month lease. This would save the client just over $105.00/month or $3,791 over the lease term. Keeping in mind that this was for existing equipment that was 31 months old.

After a discussion with the client, it was determined that we should go to the market for some competitive pricing for new replacement equipment. We were able to secure new equipment from a different vendor providing the same functions and quality imprint solutions for $14,220 for a 36-month $1 buy-out lease. In addition, the new vendor agreed to buy-out the remaining portion of the existing lease and return the equipment to the leasing company. This new agreement also included full installation with network interface installation to each user.

This allowed the client to also take advantage of the Section 179 deduction in year 2013. Additionally, the maintenance and consumables for over usage were priced less than the proposal from the existing vendor. It is hard to determine the exact savings for the consumables and maintenance unless usage is 100% similar to the past. If the usage is similar, the client will save an additional $6,012.00 ($501/quarter) over the new 36-month lease to own solution.

First Benefits Corporation Case Study

Digital Office Equipment Analysis

December 31, 2013

Konica Minolta Bizhub C280Konica Minolta Bizhub C280Konica Minolta Bizhub C280Canon ImageRunner
Existing FMV Lease*Proposed RefinanceNegotiated RefinanceProposed Solution**
Year 1 – Monthly Payment
$349.56$440.87$405.00$395.00
Year 2 – Monthly Payment$401.99

$507.00
$405.00$395.00
Year 3 – Monthly Payment$462.29$583.05$405.00$395.00
Quarterly Overage Charges
Black/White Impressions
$0.0138
$0.0095$0.0095$0.0090
Color Impressions
$0.0850
$0.0650$0.0650$0.0650
Cost for 36 Month Term – Payments Only$14,566.17$18,371.05$14,580.00$14,220.00
Total Proposed Savings over the term not including taxes and overage charges:$3,791.05$4,151.05
Savings from Excess copy charges with new solution verses existing equipment:$6,012.00
Monthly Savings over the term not including taxes and overage charges:$105.31$115.31

Total 36 Month Savings

$10,163.05
Sharing Savings Percentage for expense reduction services

50% for 24 months
Total Payment due from the shared savings of 24 months:$3,353.81
First payment due for 10% of the shared savings upon acceptance of proposal:$335.38
22 Monthly Payments of the shared savings balance due ($2,683.05):$121.96

* The Fair Market Value (FMV) of this equipment to purchase at lease end was $,2418.00

** New vendor agreed to payoff the remaining 4 months of the lease balance and return the existing equipment to leasing company. The value of this buyout and cost to return is $2,752.00 that the new vendor absorbed.