Buy vs. Lease Equipment Calculator
The Buy vs. Lease Equipment Calculator helps you evaluate whether it is more cost-effective to purchase or lease equipment.
By comparing the total costs involved in each option, you can make an informed decision based on financial implications, including interest, taxes, and inflation.
Formulas
Total Purchase Cost:
Total Purchase Cost = (Purchase Price - Salvage Value) * (1 + Tax Rate) + (Purchase Price * Interest Rate)
Total Lease Cost:
Total Lease Cost = Lease Payment * Lease Term
Net Present Value (NPV) of Purchase vs. Lease:
NPV = (Total Purchase Cost - Total Lease Cost) / (1 + Inflation Rate)^Lease Term
Step-by-Step Guide
1. Calculate Total Purchase Cost:
Inputs Required:
Purchase Price: The total cost to purchase the equipment.
Salvage Value: The estimated value of the equipment at the end of its useful life.
Interest Rate: The annual interest rate for financing the equipment purchase.
Tax Rate: The applicable tax rate for the equipment purchase.
Subtract the salvage value from the purchase price.
Multiply the result by (1 + Tax Rate).
Add the product of the purchase price and the interest rate.
Steps:
Example:
Purchase Price: $10,000
Salvage Value: $1,000
Interest Rate: 5% (0.05)
Tax Rate: 8% (0.08)
Calculation:
(10,000 - 1,000) * (1 + 0.08) + (10,000 * 0.05)= 9,000 * 1.08 + 500 = 9,720 + 500 = $10,220
2. Calculate Total Lease Cost:
Inputs Required:
Lease Payment: The monthly lease payment amount.
Lease Term (Months): The total duration of the lease in months.
Multiply the lease payment by the lease term.
Steps:
Example:
Lease Payment: $200
Lease Term: 36 months
Calculation:
200 * 36 = $7,200
3. Calculate Net Present Value (NPV) of Purchase vs. Lease:
Inputs Required:
Total Purchase Cost: From Step 1.
Total Lease Cost: From Step 2.
Inflation Rate: The expected annual inflation rate.
Subtract the total lease cost from the total purchase cost.
Divide the result by (1 + Inflation Rate) raised to the power of the lease term.
Steps:
Example:
Total Purchase Cost: $10,220
Total Lease Cost: $7,200
Inflation Rate: 3% (0.03)
Lease Term: 36 months
Calculation:
(10,220 - 7,200) / (1 + 0.03)^3 = 3,020 / 1.092727 = $2,764.27
Facts
Interest Costs: Financing equipment purchases can lead to higher overall costs due to interest.
Tax Benefits: Equipment purchases may offer tax benefits such as depreciation.
Lease Flexibility: Leasing can offer flexibility and the ability to upgrade equipment more frequently.
Inflation Impact: Inflation can erode the value of future lease payments, making leasing less attractive over time.
FAQ
What is the advantage of leasing equipment over purchasing it?
Leasing often requires a lower upfront cost and provides the flexibility to upgrade equipment more frequently. It can also be easier to manage cash flow with lower monthly payments.
How does inflation affect the decision to buy or lease equipment?
Inflation can decrease the real value of future lease payments, potentially making leasing more expensive over time. Calculating NPV helps account for inflation in comparing costs.
Are there tax benefits associated with purchasing equipment?
Yes, purchasing equipment may offer tax benefits such as depreciation deductions. These benefits can reduce the effective cost of owning equipment.
What factors should I consider when choosing between buying and leasing equipment?
Consider the total cost of ownership vs. lease costs, tax implications, interest rates, inflation, and how often you need to upgrade your equipment.
Can I use this calculator for any type of equipment?
This calculator can be used for various types of equipment. However, be sure to input accurate values specific to the equipment you are evaluating for precise results.