Lease vs Buy (After-Tax NPV)

How to use it

Enter the purchase price and the lease terms, plus your cost of capital and tax rate. Both options are converted into cash flows year by year, discounted back to today, and compared. The option with the smaller present cost wins.

Where the number comes from

• Buying starts with the full price on day one, which is why it looks expensive before anything else is counted.
• Depreciation is not cash, but the tax it saves is. Annual depreciation is (price − residual) ÷ depreciation years, and the shield is that figure times your tax rate.
• Maintenance is deductible, so it costs (1 − tax rate) of the headline figure under either option.
• Lease payments are treated as deductible operating costs, so they too cost (1 − tax rate) of the amount paid.
• Every flow is discounted at your cost of capital: a cost in year five counts for less than the same cost today.
• The residual is added as an inflow in the final year and discounted like everything else.
• The tying lease payment is solved directly, because lease present cost is a straight line in the payment amount.

What goes wrong

The part most calculators leave out.

• The residual value is the softest input and buy cases lean on it hardest. Equipment that turns out to be worth half the estimate in five years can reverse the answer entirely.
• Lease accounting has changed. Under IFRS 16 and ASC 842 most leases now sit on the balance sheet as a right-of-use asset and a liability, so the old off-balance-sheet advantage largely no longer exists. The tax treatment modelled here follows the cash cost, not the accounting entries.
• Straight-line depreciation is assumed. Accelerated allowances, first-year write-offs and capital allowance regimes can front-load the tax shield considerably and favour buying more than shown.
• Tax on the disposal is not modelled. Selling above written-down value usually creates a taxable balancing charge, which reduces the residual’s real contribution.
• Leases carry terms this arithmetic cannot see: early termination penalties, usage limits, return conditions and end-of-term purchase options. Any of them can outweigh the difference calculated here.
• Financing the purchase with debt is not modelled — this compares cash purchase against leasing. A financed purchase sits between the two.

Questions

What discount rate should I use?

Your marginal cost of capital — usually what you would pay to borrow the money, or the return you would give up by spending it. Using a higher rate favours leasing, because it penalises the large day-one outflow of buying.

Why does buying include a tax shield?

Because depreciation is deductible. You do not pay cash for it, but it lowers taxable profit, so it hands you back the depreciation multiplied by your tax rate each year. Ignoring it makes buying look worse than it is.

Does leasing still keep debt off my balance sheet?

Generally no. IFRS 16 and ASC 842 brought most leases on balance sheet as a right-of-use asset with a matching liability. If your case for leasing rests on the old treatment, it needs rechecking.

What is the break-even lease payment for?

It is the annual payment at which both options cost the same in present value. Take it into the negotiation: anything meaningfully below it makes leasing the better deal, and anything above it does not.

Does anything I type get sent anywhere?

No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.