Lease vs Buy

Assumptions Periodic Values Option Valuation

Purchase Date 1/1/2030 Call or put c
Cost of Debt (kd) 5.00% Price today 5,876,446
Cost of Equity 10.00% Strike Price 7,500,000
Cost of Capital (kwacc) 6.5% Expiration 5
Corporate Tax Rate (Tc) 30% Risk Free Rate 5%
Lease Payment $ 504,000 Volatility 10%
Purchase Price $ 7,200,000 Purchase Option Value $ 539,459
Annual Depreciation $ 145,823
Residual Value $ 7,500,000
Unreimbursed Owning Costs $ - Turn Option Value Off TRUE
Debt to Value 70% Turn Off Depreciation and OpEx FALSE
Equity to Value 30% Use FV FALSE
Years to Amortize 25

Purchase (No Debt) 2030 2031 2032 2033 2034 2035

Initial Investment/Residual Value $ (7,200,000) 7,500,000
Depreciation Tax Shields (after tax) 43,747 43,747 43,747 43,747 43,747
Unreimbursed Owning Costs (after tax) - - - - -
Purchase Cash Flows $ (7,200,000) 43,747 43,747 43,747 43,747 7,543,747
Present Value $ (7,200,000) 39,770 36,154 32,868 29,880 4,684,073
Net Present Value (NPV) $ (2,377,255)
IRR 1.4%

Purchase w/ Debt to Value Shown Above

Down Payment / Residual Value $ (2,160,000) $ 7,500,000
Debt Service (principal and interest) $ 5,040,000 (357,600) (357,600) (357,600) (357,600) (357,600)
Interest Payment (252,000) (246,720) (241,176) (235,355) (229,242)
Interest Payment (after tax) (176,400) (172,704) (168,823) (164,748) (160,470)
Principal Payment (105,600) (110,880) (116,424) (122,246) (128,358)
Remaining Principal (4,456,491)
Total Financing Costs $ (2,160,000) (282,000) (283,584) (285,248) (286,994) 2,754,681
Depreciation Tax Shields (after tax) 43,747 43,747 43,747 43,747 43,747
Unreimbursed Owning Costs (after tax) - - - - -
Total Cash Flow $ (2,160,000) (238,254) (239,838) (241,501) (243,247) 2,798,428
Present Value of Cash Flows $ (2,160,000) (223,712) (211,455) (199,926) (189,082) 2,042,519
Net Present Value (NPV) $ (941,656) If NPV is greater than Capital Lease NPV, borrow the money
IRR -2.58% If IRR is lower than Captial Lease IRR, borrow the money
If the rules conflict, choose the NPV rule

Operating Lease Analysis

Lease Expense
Lease Payments (before tax) (504,000) (504,000) (504,000) (504,000) (504,000)
Imputed Interest Rate 4.9%
Lease Payments (after tax) (352,800) (352,800) (352,800) (352,800) (352,800)
Unreimbursed Leasing Costs (after tax) - - - - -
Option Value $ -
Lease Cash Flows (after tax) - (352,800) (352,800) (352,800) (352,800) (352,800)
Present Value $ - (336,000) (320,000) (304,762) (290,249) (276,428)
Net Present Value $ (1,527,439)
IRR error

Lease vs Buy (All Cash)

Total Annual Cashflows $ (7,200,000) 396,547 396,547 396,547 396,547 7,896,547
Present Value of Annual Cashflows (7,200,000) 375,770 356,154 337,630 320,129 4,960,501
Net Present Value (NPV) $ (849,816) If positive, buying is better than an operating lease
IRR 6.24% If larger than your cost of capital, buying is better than leasing
If the rules conflict, choose the NPV rule.
Lease vs Buy (w/ Leverage)
Total Annual Cashflows $ (2,160,000) 114,546 112,962 111,299 109,553 3,151,228
Present Value of Annual Cashflows $ (2,160,000) 112,288 108,545 104,836 101,168 2,318,947
Net Present Value (NPV) $ 585,783 If positive, buying is better than an operating lease
IRR 11.65% If larger than your cost of capital, buying is better than leasing
If the rules conflict, choose the NPV rule

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Investors should verify the reliability of any financial data.