Lease or Buy Worksheet

Bean Counter - https://www.dwmbeancounter.com

Instructions

Use the Input Sheet (Tab) and Depreciation Sheet (tab) to enter your information.

After entering your information, the option with the lowest discounted cash flow amount

should be selected.

The Process

Step 1: Enter Inputs

Economic Inputs

Discount Rate – This is the rate used in cash flow analysis to account for the time value of money.

Tax Rate – This is the average tax rate for your company with a standard assumption of 20%.

Lease Inputs

Lease period – How long will the lease last

Lease Payments – The lease will spell out upfront and ongoing payments due, which provides an effective interest rate.

Maintenance Costs – Most leases require the leaseholder to pay certain maintenance and operating expenses (oil changes, utilities, etc.). Estimate the cost and timing of these expenses. You may also have to pay for wear and tear at the end of the lease term.

Upfront Costs – Some leases require a downpayment that you will need to consider

End of lease fees – Some leases require payments at the end of the lease

Early termination – Some leases require an early termination fee if you return the equipment before the end of the term

Tax Deductions – Leases can be deducted as you pay the monthly expense when the equipment is used for business purposes.

Buy Inputs

Investment Costs – These are the upfront costs or purchase price of the asset plus sales tax and freight.

Cost of Capital – Both the cost of capital for your business to assess the discount rate and the cost of debt if you choose to finance the asset.

Maintenance/Operating Costs – As the owner, you are responsible for all maintenance and operating expenses. Estimate the cost and timing of these expenses.

Capital Improvements – You may need to complete renovations and other improvements for long-term assets.

Monetization/Disposal Value – Most assets will have some value on the date of sale. This is sometimes referred to as disposal value or terminal value.

Tax Deductions – Purchases are capitalized as assets and can be depreciated over the vehicle’s life when used for business purposes. Using MACRS, you can accelerate depreciation and often save money.

Step 2: Build Amortization and Depreciation Tabs

Next, you must create amortization tables for any loan to calculate interest and principal payments. We can skip this piece since we will pay for the asset out of available cash. Regardless of payment method, you must create a depreciation table for Tax depreciation.

Step 3: Layout the Cash Flow Analysis

Now, lay out the two discounted cash flow analyses. The first will be for the lease and the second for buying. Don’t forget to account for the Tax shield and, of course, gain/(loss) on the assets.

Step 4: Compare the Net Present Value and Make a Recommendation

Compare the Buy NPV to the Lease NPV. Whichever one has the higher NPV is the winner! That said, always ensure that the cash is available to purchase. Otherwise, you must find a loan or lease regardless of the NPV.

Bonus Step: Run Scenarios

Since this analysis is dynamic, you can adjust the inputs tab for different deal terms and see ways to maximize value. For a side-by-side comparison, duplicate all of the tabs.