Lease Buy Decision
Example 1
Burgers Deluxe is considering opening an additional restaurant and wants to buy the building and land instead of leasing. They have discussed and eliminated the option of leasing. By building a new building Burgers Deluxe projects that the new property could have an estimated annual income of $200,000 for first year, $225,000 for the second year, $250,000 for the third year, and $275,000 for the fourth thru the tenth year. Burgers Deluxe owners require an annual rate of return of 10% from the investment. The new building and land will cost $1,000,000. The new building will be useful only for 10 years after which Burgers Deluxe will sell the building and land for $100,000.
Is the investment worth it?
Yes, the Net Present Value is $600,023 and the Internal Rate Of Return is 21.54 %
Example 2
Decision Information:
Equipment Cost $25,000Salvage Value 10,000
Depreciation
Year1 $5,000
Year 2 $8,000
Year 3 $4,800
Year 4 $2,880
Year 5 $2,880
Gain on Sale $8,560
Service Life 5 years
Discount Rate 7.5%
Tax Rate 20%
Lease Payment $6,000 year
Down Payment Lease $1,500
Lease Term 5 years
Maintenance $1,200 year for lease and purchase option
In this example, the NPV for leasing is ($24K) while the NPV for Purchasing is ($17K). Purchasing is the clear winner. That said, always ensure that the cash is available to purchase. Otherwise, you must find a loan or lease regardless of the NPV.