Corporate Finance & Capital Budgeting Lab

Equipment Lease vs. Buy Lab

Compare equipment leasing vs. financing using discounted cash flows (NPV), tax shields, and salvage values.

Financial Model Cash Flow Schedule Finance Theory FAQ

Asset Presets

Load calibrated equipment models.

Step 1: Financing & Lease Parameters

Equipment Purchase & Lease Structure

1. Purchase & Loan Financing

%
%
Expected resale value at end of term.

2. Equipment Lease Terms

Pre-tax monthly operating lease fee.
%
Portion of maintenance absorbed by lessor.

3. Tax & Discount Rate

%
Tax rate for depreciation/lease shields.
%
Corporate cost of capital for discounting.
NPV Cost of Buying
$0
Discounted After-Tax
NPV Cost of Leasing
$0
Discounted After-Tax
Net Advantage (NAL)
$0
Evaluating...
Total Cash (Buy)
$0
Undiscounted Cash
Total Cash (Lease)
$0
Undiscounted Cash

Step 2: Annual Timeline

Year-by-Year Cash Flow Comparison

Compares after-tax cash outflows, tax shields, and end-of-term salvage proceeds between buying and leasing.

Timeline Buy Gross Outflow ($) Buy Tax Shield ($) Buy Net After-Tax ($) Lease Gross Outflow ($) Lease Tax Shield ($) Lease Net After-Tax ($)

Corporate Finance Guide

Understanding lease vs. buy dynamics

Lease vs. buy is a capital structure and risk allocation decision balancing tax benefits, cost of capital, and asset residual risk.

  • Tax Shield Disparity: Buyers depreciate assets and deduct interest expense. Lessees deduct 100% of lease rental payments, which accelerates tax write-offs for short leases.
  • Obsolescence Protection: In rapid-innovation sectors (medical, IT), leasing transfers technological depreciation and resale risk to the lessor.
  • Residual Salvage Capture: In durable machinery with high aftermarket resale values (CNC mills, tractors), purchasing retains equity that dramatically lowers long-term TCO.

Evaluate company capital cost in the WACC Lab.

Capital Budgeting Formulas

Essential lease vs. buy formulas

Loan PMT = Principal × [r(1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)]

Buy Net Outflow = Loan PMT + Maintenance − [(Depr + Interest + Maint) × Tax Rate]

Lease Net Outflow = Lease PMT + Net Maint − [(Lease PMT + Net Maint) × Tax Rate]

NPV = Σ [ Net Outflowₜ ÷ (1 + Discount Rate)ᵗ ]

NAL = NPV(Buy) − NPV(Lease)

Model project return in the Capital Budgeting NPV/IRR Lab.

FAQ

Equipment lease vs. buy questions

How is the Net Advantage to Leasing (NAL) calculated?

NAL = NPV(Total Cost of Buying) − NPV(Total Cost of Leasing). A positive NAL indicates that leasing minimizes net after-tax discounted cash outflows, making it financially superior.

What discount rate should be used in lease vs. buy analysis?

Standard corporate finance practice uses the after-tax cost of debt: Discount Rate = Pre-Tax Cost of Debt × (1 − Corporate Tax Rate), or the company's Weighted Average Cost of Capital (WACC).

How do tax shields differ between leasing and purchasing?

Purchasing allows tax deductions for equipment depreciation and loan interest payments. Operating leases allow 100% of lease payments to be deducted as operating expenses.

What role does residual salvage value play in the decision?

The buyer retains ownership and captures the asset's salvage value at the end of the term. Higher expected resale values favor purchasing, while high obsolescence risk favors leasing.

Can I export year-by-year cash flow schedules to CSV?

Yes. You can export complete loan payments, tax shields, discounted cash flows, and NAL metrics as a UTF-8 CSV spreadsheet with formula injection defense or print an executive audit memo.

Is this tool certified accounting, tax, or legal advice?

No. This tool provides educational capital budgeting and corporate finance models for business training without commercial CPA, leasing brokerage, or tax filing guarantees.

Continue Exploring Finance & Cash Tools

Explore our Cash Flow & Break-Even Hub, evaluate project returns in the Capital Budgeting Lab, calculate corporate hurdle rates in the WACC Lab, or model risk in the Financial Ratio Lab.