If you were buying a vending machine business, would you pay for a higher multiple for a business where you owned the machines and they depreciate normally, or one in which you leased the machine? The cost of depreciation and lease are the same dollar amo
I am practicing my technical questions and am still confused on how the vending machine business with a lease has a higher multiple (Buying Price) than the vending machine business who owns their machines. Wouldn't owning your machines make you more profit in the long run and in return lead to a higher multiple? Also I know that EBITDA means it doesn't account Depreciation and Amortization, but EBIT does and I have no idea how that comes into play.
Yeah everything about this question is fucked up. First of all the entire concept of differing multiples is a mental shortcut, you always want to get the cheapest price possible and in this situation whatever the better route is the difference should not be based on a simple multiple of EBITDA. Also the premise that the lease payment would be the same as GAAP depreciation sounds phony because that either implies that the leasing company is charging no interest or is offering an extended term and talking huge residual value risk. A big part about evaluating the scenario is the equipment itself, will it likely last much longer than the depreciation schedule or is the converse true where it might become functionally obsolete with newer versions?
Agree with the above that it's a fucked up question, but holding all else equal (big assumption), since depreciation = lease (big assumption, also a big assumption that this is true for the entire useful life of the assets), why would you would get more profit in the long run by owning your machines? You don't. So going strictly off the numbers, EBITDA of leasing < EBITDA of owning but the businesses are the same in every other way, so they have the same valuation but one has lower EBITDA and therefore a higher multiple. Going off an EBIT multiple, they should be the same.
All in all dumb question but the concept makes some sense to, for example, understand why something like EBITDAR is useful for airlines because some lease and some own
That's a Point72 application question.
Isn't leasing superior in this case? Since depreciation = lease expense the margins are the same, but leasing is less capital intensive since you don't have to buy the machines, so ROIC is higher. Haven't thought about it extensively, could be wrong
Actually that clears it up since paying for the machine was probably more expensive then just leasing because the machines could have cost $500,000 in total and leasing it would been more cash in his account. This helped thank you!
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