Equipment Lease vs Buy NPV Calculator
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.
Your numbers
Installed cost you would capitalize if you bought the asset.
Lease term. Tax depreciation is assumed straight line to zero over this term.
Use the after-tax borrowing rate, because both options are debt-like cash flows.
Marginal rate on the deduction for lease payments and depreciation.
Paid at the end of each year, fully deductible.
Pre-tax resale value at the end of the term. Taxed as a gain since book value is zero.
Your results
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.
PV cost of buying vs leasing by discount rate
Sweeps Discount rate (after-tax cost of debt) from 3 to 15, holding your other inputs fixed.
Capital request review
Optional: send your lease and purchase quotes and we will sanity check the assumptions and sensitivity.
Optional. The tool and every export work without this. No spam.
How to use it
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
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.
- 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
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.
Frequently Asked Questions
Which discount rate should I use?
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?
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?
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?
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.
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.
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