RC students have to decide if it is more advantageous to purchase or rent tuxedos for upcoming formal events.
As Holidazzle approaches, RC students may be wondering whether to pay the $75 for a rental tux or buy an equivalent tux for roughly $300. Well, why not apply our newly-acquired Finance skills to solve this problem?
.SO TELL ME ABOUT YOUR DISCOUNT RATE
A few quick assumptions are important:
– $20 cleaning fees for your tux every time you use it
– 4 years of use
– “Year Zero” is today
– All cash flows occur at the end of the year
The first variable is what your assumed discount rate is. Despite suggestions that I utilize the CAPM equation to derive some applicable discount rates, the analysis is done merely using the extremes of what might be appropriate for the HBS constituency. For those entrepreneurial types with highly uncertain future cash flows, the upper bound of 30% might make sense, while blue-chip recruits might want to refer to outputs based on the 10% assumption.
The second variable is how many times you expect to need a tuxedo per year. A minimum baseline is two-starting with Holidazzle and Newport Ball this year. Social butterflies such as SA Co-President Scott Daubin (OE) expect at least 6 uses per year-most of us just wish we knew where he was going on weekends. An example of the NPV analysis follows.
WHAT WOULD YOU DO? WHO WANTS TO START?
The table below shows how much can be saved by purchasing a tuxedo rather than renting based on the variables described above.
As you can see, in most cases it makes sense to buy your tux. However, keep in mind that an expanding mid-section could quickly turn the tables, and the salvage value is negligible. At the end of the day, however, the pressing issue many of us are dealing with is related to cash flows rather than our personal balance sheets or income statements.
The model will not be posted on the Course Platform.
AUTHOR’S BIOGRAPHY
Dan Monahan is a new writer for the Harbus. Your feedback is always welcome, unless it’s bad. Send random judgments to dmonahan@mba2011.hsb.edu.
