Whether to lease or buy equipment comes down to after-tax present-value cost. Compare lease payments with the cost of borrowing to buy, including depreciation tax shields, maintenance and residual value.
How it works
Compare the after-tax present-value cost of leasing an asset with borrowing to buy it, including depreciation tax shields, maintenance and residual value.
Discount rate = Pre-tax borrowing rate × (1 − Tax rate)
Lease cash flow = −Payment × (1 − Tax rate)
Buy cash flow = −Price (year 0) + Depreciation × Tax rate − Maintenance × (1 − Tax rate) + Residual value (final year)
Net advantage of leasing = PV cost of buying − PV cost of leasingCommon uses
- Equipment, vehicle and technology acquisition decisions
- Capital budgeting requests and investment committee memos
- Negotiating lease terms with lessors
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Purchase price | $250,000 |
| Lease term / holding period | 5 years |
| Residual (salvage) value at end | $40,000 |
| Annual lease payment | $58,000 |
| Lease payment timing | Beginning of year (in advance) |
| Annual maintenance if buying | $3,000 |
| Pre-tax borrowing rate | 7% |
| Tax rate | 21% |
| Net advantage of leasing | ($14,398) |
| PV cost of leasing | $206,315 |
| PV cost of buying | $191,917 |
| After-tax discount rate | 5.53% |
| Break-even lease payment | $53,953 |
Lease and loan cash flows are discounted at the after-tax cost of debt, since a lease is a substitute for borrowing. Depreciation is straight-line to residual value; use your tax depreciation method for a tax-precise result.
Interpreting the results
- A positive net advantage means leasing is cheaper on an after-tax present-value basis.
- The residual value is the most uncertain input; test a range, especially for technology assets.
- Qualitative factors also matter: flexibility, obsolescence risk, covenants and the balance-sheet effect of ASC 842.
Frequently asked questions
Why discount at the after-tax cost of debt?
A lease is a substitute for borrowing: it commits the company to fixed payments much like a loan. Discounting both alternatives at the after-tax borrowing rate compares them on the same financing basis.
What is the net advantage to leasing?
The net advantage to leasing is the present-value cost of buying minus the present-value cost of leasing. A positive value means leasing is cheaper; a negative value means buying is cheaper.
Does ASC 842 change the lease-or-buy decision?
ASC 842 puts most leases on the balance sheet, which removes much of the reporting advantage leases once had. The economic comparison of cash flows is unchanged, but covenant and ratio effects should be reviewed.
Related calculators
- Lease Accounting Calculator (ASC 842): Lease liability, ROU asset and full amortization schedule for operating or finance leases.
- NPV & IRR Calculator: NPV, IRR, MIRR, profitability index and payback for any cash-flow stream.
- Loan Amortization Schedule: Payment, full amortization schedule and interest saved with extra payments.
- Depreciation Calculator: Straight-line, double-declining, SYD, units-of-production and MACRS schedules.
- Deferred Tax Calculator (ASC 740): Deferred tax assets and liabilities from book-tax basis differences.