Lease Calculator List

The Economics of Leases

About Denver Tax Software

The Determining Factors

Cashflows. What are the cashflows related to leasing or buying an asset and when do those cashflows occur?

Discount rate. What discount rate should be used to discount the cashflows to the present to arrive at the net present value.

Cashflows

Leasing

Cashflows for leasing include:

• Lease payments.
• Deposits.
• Sales tax (sometimes).
• Penalties at the end of the lease.
• Costs to buy the asset at the end of the lease, if desired.
• Tax issues for business assets. Items like depreciation and interest expense can be important. Depreciation can be limited for many vehicles.

Buying

Cashflows for purchasing include

• Purchase price
• Downpayment
• Sales tax
• Loan payments
• Revenue from disposition (sale) of asset. This is a critical consideration! Even worse - you don't know what that amount is. Use a lease vs. buy analyzer to run several variations to determine what the economics of leasing and purchasing are for different sale amounts.
• Tax issues for business assets. Rent is deductible. However, for some vehicles a lease inclusion amount is added back to income to attempt to adjust for any limited depreciation.

Discount Rate

The discount rate is the rate used to discount projected cashflows back to the present. The total of those discounted cashflows is called the net present value. The use of net present value is important in considering the time value of money. The successful lessors use the time value of money to figure out what rent you are going to pay. They use net present value calculations to make sure that your rent, plus the value of the vehicle at the end of the lease is enough to cover their finance costs, plus generate a nice profit for them. You better use net present value calculations yourself to determine if you are better of to lease or buy.

The discount rate is the after tax rate of return that you would expect on an investment that is competing for the funds that you would use to buy the asset that will be leased or purchased.

The bad news is the discount rate might be hard to determine. Use a lease vs. buy analyzer to see what the results would be for various discount rates.