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I have been torn over one of the epoch questions: buy your server equipment, or enter a 3 year lease?

It appears that the 3 year leases end up costing close to the same amount as a straight up purchase, but of course with a lease you're not paying all at once. There are other factors too, but what I'm wondering is if I purchase server equipment now, how much depreciation can I expect in 3 years? Do different components or brands depreciate more rapidly than others? Also, where would I resell my 3 year old equipment?

Thanks for the help.

-Storm

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9 Answers 9

up vote 2 down vote accepted

A decent server could give you as much as 8 years or more if the hardware holds up - just move it into less demanding roles as it starts to age (print server, WSUS, stuff like that). It all depends on whether short-term savings are in demand right now, really.

Server components - unless the box is really ultra-cheap - tend to be higher quality and therefore last longer than PC components too. Generally speaking, if it doesn't fail in the first month or so (when it should be still under even the most basic warranty), you're going to get that full 8 years out of it, barring accidents like being struck by lightning.

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Plus bonus to this mentality is that you can pick up a 3-year-old server for non-critical roles for dirt cheap. We just bought a fully loaded Dell blade system (10x Dual 3.2, 4gb, 2x148gb) for < $5k, which will be used for taking the load off more critical systems (things like DNS and WSUS). –  Mark Henderson Aug 31 '09 at 23:25
    
Buying hardware maintenance changes this logic some. If you're paying for maintenance there the cost goes up as the hardware gets older. So by year six you're paying nearly what it costs to get a new server in a single year's maintenance contract. –  Laura Thomas Sep 1 '09 at 0:41

I can't talk with much authority but when i worked at AOL I was in a constant race to find and retrieve the equipment we leased and send it back to hp or sgi or cisco. If we were laet we go popped pretty heavily and that is to say we could find it at all ( a lot of problems came from room access / bar codes falling off or just being put on wrong) (keep in mind we had 3 major data centers at the time each with like 10 rooms that were the size of normal data centers)

It seems like if you also might have a forced migration path if you lease because you have to give the server back (this could be a good or bad thing depending on how you look at it) Vs if you own it you can just let it ride and go buy a new system for your new apps (again can be good or bad)

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+1 for the hidden costs of policing your leases –  Kara Marfia Sep 1 '09 at 14:46

There are plenty of used/refurb server sellers out there. Any one of them would love to buy your old equipment, for about half what they will sell it for (or less). Just google/bing for "used server " and take a look.

Value of old servers is highly variable, but has to do with obsolescence. If you buy a new, low-middle end server with an older generation processor, it will be nearly worthless after 3 years. If you buy a high-middle-end server with the fastest processors available, it will be greatly devalued after 3 years, but worth quite a bit more, including more percentage-of-initial-price, than the first example.

None of this has much to do with Depreciation as an accounting principle. The resale value of the server is only one term in the Depreciation equation. You have to determine how long the server is considered useful, or scheduled for decommisioning, and whether you are using straight line or accelerated depreciation. For an accurate answer of what you can use (and get away with in an audit), ask an Accountant.

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Unless you are starting your own hosting company to resell compute + storage, I see no point in buying hardware since servers are now a commodity. I would recommend a cloud computing platform. If you must use real hardware, I say lease.

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Lease versus Buy is almost completely a question for accounting. It depends on things like your company's cash flow, depreciation methods, property taxes, cash cost and interest rates.

That being said, the problem with leasing servers is that rarely is a server ready to be returned after three years, so you are always going to be taking the buyout option. It isn't like desktops where a forced refresh of hardware every three years may be a good thing.

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Here's a question to ask yourself: At the end of the lease, would I buy that equipment for the fair market value? You'll have to guess at what that is, but I usually assume about 35% for our 2 year leases (based on after lease quotes from our vendors.) Would you buy a machine that was new 3 years ago for your production environment today? The power savings and performance per watt have increased very significantly over the past 3 years.

You also need to think about your deployment process. If you have it automated (enough) that moving from one piece of hardware to another is not very time consuming and requires zero downtime, then a lease is ok. If your deployment process tends toward one-off configs such that you'd be likely to purchase that hardware at the end of the lease anyway, just buy it now. Then fix your deployment process. If you can't rebuild your machines in an automated way you're losing the ability to lease effectively. Leasing isn't right on every deal, but you don't want to close the door because of a technical hurdle.

As for the financial angle, ask your CFO or accountant about the terms of the lease and if they think it's a good idea from the financial side of the business.

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It all depends on how you use your servers and how you spec them. Many companies will purchase servers for specific roles and will replace them after 2 or 3 years, so leasing might well be an option for them. I have in the past purchased servers for a planned 10 year life. This can only be done by having a solid understanding of what the server will do over its lifetime, plus expectations of the results of upgrading both OS and apps, so certainly isn't applicable everywhere. As a general rule I will expect a minimum of 5 to 6 years out of a server, although not necessarily in its original role. Clearly, leasing would not be a good option for me.

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Regarding kmarsh's answer, the value of your old server hardware can also depend greatly on the quality of the data that comes with it. :-P

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I think your question can really go two ways. There is the accounting definition of depreciation, and then there is the "real life" server depreciation, how much you could sell them for, and what kind of use they get out of them.

Our accountants depreciate our servers over a 3 year period. Meaning, from an accounting standpoint, they are not worth anything after 3 years.

However, we all know from an operational standpoint, servers last much longer than 3 years.

Leasing will rarely make sense financially unless you are trying to conserve cash in the short term. Someone makes money off of a lease, and that someone is the bank - and you pay for it. However, if you do need to conserve cash in the short term, you could always get a loan for the equipment or price out a $1 buyout lease. That way you keep the equipment but still have a low monthly (or other term) payment.

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From a 'does this thing still power on' standpoint a server can last much longer than 3 years. From a 'do I want a 3 year old server in my web farm' standpoint, the machine is over the hill and should have been retired long ago. It really depends what you're going to do with the machines. It is also more of a 'business' decision on whether to lease or not. Leasing also forces you to keep your systems updated. If you have an incentive to keep your systems in state that can be recreated easily you're more likely to leave a working system for the next guy in line (which is good for the biz.) –  toppledwagon Sep 15 '09 at 18:23

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