Lease vs. Buy Calculator
Evaluate equipment leasing versus debt-financed purchasing with Net Present Value (NPV), loan amortization schedules, corporate tax shields, and residual salvage modeling.
NPV Outflow Savings: $2,626
The optimal strategy is to BUY, saving you $2,626 in present value cash.
| Month | Lease Flow | Lease Discounted | Buy Flow | Buy Discounted | Net Lease Advantage |
|---|---|---|---|---|---|
| Month 0 | -$2,441 | -$2,441 | -$5,600 | -$5,600 | $3,159 |
| Month 1 | -$1,046 | -$1,039 | -$1,159 | -$1,152 | $114 |
| Month 2 | -$1,046 | -$1,032 | -$1,161 | -$1,145 | $115 |
| Month 3 | -$1,046 | -$1,025 | -$1,162 | -$1,139 | $116 |
| Month 4 | -$1,046 | -$1,018 | -$1,164 | -$1,133 | $118 |
| Month 5 | -$1,046 | -$1,012 | -$1,165 | -$1,127 | $119 |
| Month 6 | -$1,046 | -$1,005 | -$1,166 | -$1,121 | $121 |
| Month 7 | -$1,046 | -$998 | -$1,168 | -$1,115 | $122 |
| Month 8 | -$1,046 | -$992 | -$1,169 | -$1,109 | $123 |
| Month 9 | -$1,046 | -$985 | -$1,171 | -$1,103 | $125 |
| Month 10 | -$1,046 | -$979 | -$1,172 | -$1,097 | $126 |
| Month 11 | -$1,046 | -$972 | -$1,174 | -$1,091 | $128 |
| Month 12 | -$1,046 | -$966 | -$1,175 | -$1,085 | $129 |
| Month 13 | -$1,046 | -$959 | -$1,176 | -$1,079 | $131 |
| Month 14 | -$1,046 | -$953 | -$1,178 | -$1,073 | $132 |
| Month 15 | -$1,046 | -$947 | -$1,179 | -$1,068 | $134 |
| Month 16 | -$1,046 | -$940 | -$1,181 | -$1,062 | $135 |
| Month 17 | -$1,046 | -$934 | -$1,182 | -$1,056 | $137 |
| Month 18 | -$1,046 | -$928 | -$1,184 | -$1,050 | $138 |
| Month 19 | -$1,046 | -$922 | -$1,185 | -$1,045 | $140 |
| Month 20 | -$1,046 | -$916 | -$1,187 | -$1,039 | $141 |
| Month 21 | -$1,046 | -$910 | -$1,189 | -$1,034 | $143 |
| Month 22 | -$1,046 | -$904 | -$1,190 | -$1,028 | $144 |
| Month 23 | -$1,046 | -$898 | -$1,192 | -$1,023 | $146 |
| Month 24 | -$1,046 | -$892 | -$1,193 | -$1,017 | $147 |
| Month 25 | -$1,046 | -$886 | -$1,195 | -$1,012 | $149 |
| Month 26 | -$1,046 | -$880 | -$1,196 | -$1,007 | $151 |
| Month 27 | -$1,046 | -$874 | -$1,198 | -$1,001 | $152 |
| Month 28 | -$1,046 | -$868 | -$1,200 | -$996 | $154 |
| Month 29 | -$1,046 | -$863 | -$1,201 | -$991 | $155 |
| Month 30 | -$1,046 | -$857 | -$1,203 | -$985 | $157 |
| Month 31 | -$1,046 | -$851 | -$1,204 | -$980 | $159 |
| Month 32 | -$1,046 | -$846 | -$1,206 | -$975 | $160 |
| Month 33 | -$1,046 | -$840 | -$1,208 | -$970 | $162 |
| Month 34 | -$1,046 | -$834 | -$1,209 | -$965 | $164 |
| Month 35 | -$1,046 | -$829 | -$1,211 | -$960 | $165 |
| Month 36 | -$6,500 | -$5,117 | $6,287 | $4,950 | -$12,787 |
Mathematical Foundations of Lease vs. Buy Valuation
Discounted cash flow modeling, Net Present Cost formulation, and after-tax tax shield mechanics
In corporate treasury and capital allocation, comparing an equipment lease against debt-financed ownership is not merely a question of comparing raw monthly installments. It requires evaluating the Net Present Cost (NPC) of all after-tax cash outflows discounted at the firm's cost of capital (k):
1. The Lease Alternative Cash Flow Equation
Under an operating or Fair Market Value (FMV) lease, monthly lease payments are fully deductible operating expenses. The net after-tax cash outflow at each period t is the lease payment reduced by the tax deduction shield:
Where T_c is the corporate income tax rate, k is the periodic discount rate (WACC or after-tax cost of debt), and n is the total number of lease periods.
2. The Debt-Financed Purchase Alternative Cash Flow Equation
When purchasing an asset via a commercial term loan, the firm pays principal and interest. While principal repayments are non-deductible balance sheet transfers, the business captures two distinct tax shields: the Interest Tax Shield and the Depreciation Tax Shield (via MACRS or straight-line accounting):
Implicit Money Factor and Lease APR Mechanics
In equipment and vehicle leasing contracts, lessors frequently quote a Money Factor (MF) rather than an annual percentage rate. The mathematical equivalence is:
Equipment Financing & Lease Structures Matrix
Comparative analysis of legal ownership, balance sheet presentation, and tax treatment
| Structure | Legal Ownership | Monthly Cash Outflow | Residual Value Risk | ASC 842 Accounting | Primary Corporate Benefit |
|---|---|---|---|---|---|
| Fair Market Value (FMV) | Lessor retains title | Lowest (Subsidized by Residual) | Borne entirely by Lessor | Operating Lease (ROU Asset) | Protects against rapid technology obsolescence |
| $1 Buyout Lease | Transfers to Lessee for $1 | Higher (Full Amortization) | Borne by Lessee | Finance Lease (Depr + Interest) | Section 179 expensing with 100% upfront financing |
| 10% Purchase Option | Option to buy at 10% price | Moderate (Blended payment) | Shared cap at 10% | Finance or Operating depending | Predetermined end-of-term buyout certainty |
| Bank Term Loan (Buy) | Lessee owns (Lender lien) | Requires 10–20% Down Payment | Borne entirely by Lessee | Fixed Asset + Debt Liability | Full equity accumulation & salvage value capture |
| Cash Purchase (CapEx) | Immediate unencumbered title | 100% Upfront Liquidity Drain | Borne entirely by Lessee | Cash reduction + Fixed Asset | Zero interest expense and complete operational control |
Frequently Asked Questions
Authoritative guidance on lease structuring, tax deductions, and capital budgeting
How does the Net Present Value (NPV) of a lease compare mathematically with debt-financed purchasing?
Both options are evaluated by discounting their after-tax cash flows using the firm's cost of capital (WACC) or after-tax cost of debt: NPV_lease discounts monthly lease payments minus lease rental tax deductions, while NPV_buy discounts loan payments minus interest tax shields and depreciation tax shields, offset by the discounted terminal salvage value. The decision favors the option with the lowest Net Present Cost.
What is the difference between a Fair Market Value (FMV) lease and a $1 Buyout capital lease?
An FMV lease (operating lease under ASC 842) features lower monthly payments because the lessor retains ownership and assumes residual risk, giving the lessee the option to return or buy the asset at market price at term end. A $1 Buyout (finance lease) amortizes the entire asset cost, transferring title automatically to the lessee for $1 upon completion.
How do depreciation and interest tax shields reduce the true cost of purchasing equipment?
Under corporate tax regulations (e.g., IRC Section 168/179), asset depreciation and loan interest are tax-deductible business expenses. Each dollar of depreciation and interest saves $(1 × Tax Rate) in taxes, significantly lowering net cash outflows relative to raw debt service payments.
Why is the discount rate critical in lease-versus-buy capital allocation decisions?
Higher discount rates (such as a high startup WACC of 12% to 15%) heavily penalize the large upfront capital outlay and early cash requirements of buying, making leasing more financially attractive. Conversely, low discount rates favor buying because future depreciation tax shields and terminal salvage equity retain higher present value.
How does ASC 842 and IFRS 16 accounting affect balance sheet presentation for leased assets?
Modern accounting standards mandate that almost all commercial leases (both operating and finance) must be recognized on the corporate balance sheet as a Right-of-Use (ROU) Asset and corresponding Lease Liability, eliminating historical off-balance-sheet financing while maintaining differing P&L expense recognition profiles.