Lease v. Buy Advisor

Ask yourself these questions: When evaluating the acquisition of an asset, how do you know which is more advantageous, leasing or financing? Is the salesperson pushing a leasing plan because they will make more money due to increase costs to you? Or are they pushing the lease because it really does net a lower cost and they just want to do whatever they can to make the sale?

Making a thorough evaluation is not easy. You have to consider not only payment amounts, but taxes, interest, buy-back options and penalties as well as future resale value. And if the asset is for business use, you also need to consider depreciation and possible other tax deductions.

The Lease vs Buy Advisor analyzes the economic consequences of leasing vs. buying. A lease is a contract. The user of an asset "borrows" the asset for a specified period of time, at which point the user of the asset normally decides if they will buy the item or give it back to the owner. The price for which the asset can be purchase at the end of the lease is called the option price.

This advisor analyzes both the lease and finance cash flows over the life of the lease. That is, if the lease is for 33 months, both the lease and the buy cash flows will be looked at for 33 months. This is done to put the two on equal footing. (The terms of the financing maybe something other than the term of the lease. It is just that for the purpose of making a comparison, a snap shot is taken at the end of the leasing period.

At the end of the lease, the asset is usually returned to its owner. Because of this, both the lease scenario and buy scenario should be such that the asset is either given up, or sold at the end of the lease term. Let's assume the lease is for 33 months and at the end of the lease the asset is worth $8,500. The lease and buy scenarios at the end of the term would be as follows:

Lease Scenario:

The asset worth $8,500 might be given up, or, if there is an option to purchase the asset at the end of the lease, you might want to purchase it. If the option price is $6,000 and the asset is worth $8,500, you would pay $6,000 to buy the asset, and resell it for $8,500, pocketing the $2,500 profit. If the asset is worth $8,500, and the option price is say $10,000, you don't need a computer to tell you to give the asset back to the owner.

If the leased asset can be acquired and sold for profit, the Advisor figures the cash flow from the gain. The advisor will also calculate any tax consequences as a result of the event. (You don't think that the tax man would allow you to keep all of the profit, do you?)

Buy Scenario:

The advisor assumes the asset is sold in the same period that the lease term would be up in the lease scenario. Using the above example that would be in the 33rd month. The advisor calculates the cash flow from the sale proceeds and any tax cost or savings on the sale.

The program calculates cash flows for both the lease and buy scenarios. It then gives you the net amount of cash paid out and the present value of those payments for each scenario. A new feature in this version of the calculator allows the user to print a detailed projected cash flow for both the financing side as well as the lease side of the problem.

For those of you who are more visually oriented, this calculator includes a charting module which visually shows the lease costs vs. the cost of financing.

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