Lease Contract Pricing Model
A large Brazilian Multinational needed a pricing study for their fixed assets leasing contracts considering all the risks and returns, operational costs and the future resale price of those assets in case of buyouts or disposal of those assets.
Pricing long term contracts for fixed assets is a challenging task since sale (or buyout) occurs much later than their acquisition. In addition to projecting the operation cash flow, it was necessary to model the depreciation of the assets over time, since this is a factor that has a major influence on the final profitability of the contract.
With thousands of data points collected from the markets, a model of the depreciation curve for each particular asset was built. With this information, cash flows were projected, and the risks of each leasing contract were evaluated based on Monte Carlo simulations.
The benchmark established by the pricing model provided our customer with key insights, giving him the upper hand in the lease negotiation. As a result, our customer achieved about 25% reduction in the price of the leasing contract.