# Equipment Lease vs Buy NPV Calculator

> Source: https://netray.co/tools/equipment-lease-vs-buy-npv-calculator
> Publisher: Netray (netray.co), AI and integration engineering for ERP and manufacturing systems.
> Section: Free Tools

## Short answer

Discounts after-tax lease payments against the net cost of buying (price less depreciation tax shield less after-tax residual) and shows which is cheaper today.

## Category

cost-finance

## Industry

Discrete Manufacturing

## Audience

- CFO
- Controller
- Plant manager

## Tool

**Kind:** calculator

**Currency:** $

**Inputs:**

#### Purchase price

**Key:** price

**Type:** number

**Default:** 250000

**Min:** 0

**Step:** 5000

**Unit:** $

**Help:** Installed cost you would capitalize if you bought the asset.

#### Analysis term

**Key:** life

**Type:** number

**Default:** 5

**Min:** 1

**Max:** 20

**Step:** 1

**Unit:** years

**Help:** Lease term. Tax depreciation is assumed straight line to zero over this term.

#### Discount rate (after-tax cost of debt)

**Key:** rate

**Type:** number

**Default:** 8

**Min:** 0.5

**Max:** 30

**Step:** 0.5

**Unit:** %

**Help:** Use the after-tax borrowing rate, because both options are debt-like cash flows.

#### Tax rate

**Key:** tax

**Type:** number

**Default:** 25

**Min:** 0

**Max:** 60

**Step:** 1

**Unit:** %

**Help:** Marginal rate on the deduction for lease payments and depreciation.

#### Annual lease payment

**Key:** lease

**Type:** number

**Default:** 58000

**Min:** 0

**Step:** 1000

**Unit:** $

**Help:** Paid at the end of each year, fully deductible.

#### Residual value if owned

**Key:** resid

**Type:** number

**Default:** 40000

**Min:** 0

**Step:** 1000

**Unit:** $

**Help:** Pre-tax resale value at the end of the term. Taxed as a gain since book value is zero.

**Outputs:**

#### Discount rate (decimal)

**Key:** r

**Expr:** rate / 100

**Format:** decimal

#### Annuity factor

**Key:** af

**Expr:** (1 - 1 / pow(1 + r, life)) / r

**Format:** decimal

**Description:** Present value of 1 paid at the end of each year for the term.

#### PV of after-tax lease payments

**Key:** pv_lease

**Expr:** lease * (1 - tax / 100) * af

**Format:** currency

#### PV of depreciation tax shield

**Key:** pv_shield

**Expr:** price / life * (tax / 100) * af

**Format:** currency

#### PV of after-tax residual

**Key:** pv_resid

**Expr:** resid * (1 - tax / 100) / pow(1 + r, life)

**Format:** currency

#### Net PV cost of buying

**Key:** pv_buy

**Expr:** price - pv_shield - pv_resid

**Format:** currency

**Primary:** true

#### Advantage of leasing (positive = lease is cheaper)

**Key:** adv

**Expr:** pv_buy - pv_lease

**Format:** currency

**Primary:** true

**Chart:**

#### PV cost of buying vs leasing by discount rate

**Type:** line

**X:** rate

**From:** 3

**To:** 15

**Steps:** 25

**Series:**

- pv_buy
- pv_lease

**Disclaimer:** Simplified model: year-end payments, straight-line tax depreciation, no maintenance or insurance differences, no investment tax credits or bonus depreciation. Confirm lease classification and tax treatment with your advisor.

## Content

**Intro:** Leasing a machine and buying it are both financing decisions, and the cheaper one is the one with the lower present value of after-tax cash out. This calculator discounts both streams at your after-tax borrowing rate so the comparison is apples to apples.

**Sections:**

#### How to use it

**Body:** Enter the installed purchase price, the lease term, the annual lease payment and the expected resale value. Set the discount rate to your after-tax cost of debt, not your cost of equity, because a lease commits you to fixed payments much like a loan. The result shows the net present value cost of buying, the present value cost of leasing and the gap between them. A positive advantage means leasing costs less in today's dollars.

#### The method behind it

**Body:** Buying costs the price today, reduced by the present value of the depreciation tax shield and by the after-tax residual proceeds. Leasing costs the present value of after-tax payments. Annuity factor equals (1 minus 1 divided by (1 plus r) to the power n) divided by r.

**Bullets:**

- Tax shield per year = price / term x tax rate.
- After-tax residual = residual x (1 - tax rate), since book value is zero at the end.
- After-tax lease payment = payment x (1 - tax rate).
- Lower net PV cost wins; the chart shows how the answer flips as rates move.

#### Reading the result and common mistakes

**Body:** Close results (within a few percent of the price) should be decided on non-financial factors: technology obsolescence, maintenance bundled in the lease, balance sheet and covenant effects, and flexibility to upgrade. Common errors include discounting at the weighted cost of capital, ignoring the residual, and comparing a lease with embedded service against a bare purchase. If the lease includes maintenance, add the avoided maintenance cost to the buy side before comparing.

**Cta:** If your ERP fixed asset module and AP lease schedules hold the real numbers, we can pull them into a standing lease versus buy view for your capital requests.

**Faq:**

#### Which discount rate should I use?

**Answer:** Use your after-tax cost of secured debt. A lease is a fixed obligation that substitutes for borrowing, so its risk is closer to debt than to the operating risk of the equipment. Using a higher rate tilts the answer toward leasing.

#### Does this cover ASC 842 or IFRS 16?

**Answer:** No. Those standards govern how a lease appears on your balance sheet and income statement, not which option has the lower economic cost. Run the economics here and have your accountant classify the lease separately.

#### What if I pay lease payments in advance?

**Answer:** This model assumes year-end payments. Advance payments raise the present value of the lease slightly, so leasing will look a little less attractive than shown. Increase the lease payment by about the rate to approximate it.

#### Why is the residual taxed?

**Answer:** Equipment depreciated to zero for tax has no remaining tax basis, so any sale proceeds are taxable gain or recapture. Your jurisdiction may treat it differently, so adjust the residual to its after-tax equivalent if needed.

## Search terms

lease vs buy equipment calculator, equipment lease or buy NPV, CNC machine lease vs purchase analysis, lease versus buy tax shield, capital equipment financing comparison, after tax cost of leasing, buy vs lease machinery spreadsheet

---
Talk to an engineer: https://netray.co/contact?intent=erp_ai | Machine catalog: https://netray.co/agent/catalog.json