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Lease vs Buy Decision Analysis

The document compares the costs and benefits of leasing versus buying a $30,000 machine for a company over 5 years. Leasing is more beneficial with a positive NPV of $3,665.95. The minimum lease payment the lessor would accept is $7,161.70 to break even. The maximum payment the lessee could pay is $7,408.13 to break even.

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Hoàng Trâm
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19 views2 pages

Lease vs Buy Decision Analysis

The document compares the costs and benefits of leasing versus buying a $30,000 machine for a company over 5 years. Leasing is more beneficial with a positive NPV of $3,665.95. The minimum lease payment the lessor would accept is $7,161.70 to break even. The maximum payment the lessee could pay is $7,408.13 to break even.

Uploaded by

Hoàng Trâm
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Lessor Lessee

Tax rate 20% 34%


Cost Saving 5000
Machine Cost 30000
Economic Life 5
Lease Payment 6125
Depreciation 30000/5 = 6000
After tax
5%
riskless rate

 Buy Decision
- Cost of Machine = 30000
- After tax saving = 5000 x (1 - 34%) = 3300
- Depreciation tax shield = 6000 x 34% = 2040
- Total cash flow = 3300 + 2040 = 5340
 Lease Decision
- After tax saving = 5000 x (1-34%) = 3300
- After tax lease payment = -6125 x (1 – 34%) = -4042.5
- Total cash flow= -4042.5 + 3300 = -742.5

 Lease instead of buy decision:

Cash flow if Cash flow if Lease instead


Year Present Value
buy lease of buy
0 -30000 - 30000 30000
-742.5 – 5340 = -6082.5/(1+5%)1 =
1 5340 -742.5
-6082.5 -5792.86
-6082.5/(1+5%)2 =
2 5340 -742.5 -6082.5
-5517.01
-6082.5/(1+5%)3 =
3 5340 -742.5 -6082.5
-5254.29
4 5340 -742.5 -6082.5 -6082.5/(1+5%)4 =
5 5340 -742.5 -6082.5 -6082.5/(1+5%)5 =
NPV 3665.95
 NPV = 3665.95 >0 => ABC should lease the machaine
 Find Lmin (Lessor)
- Cost of machine = -30000
- Depreciation tax shield = 6000 x (1 – 20%) = 1200
1 1
- Discount value = 1 +…+ = 4.3294
( 1+5 % ) ( 1+5 % )5
30000 1200
 Lmin = 4.3294 (1−20 %) - 1−20 % = 7161.7
- After tax lease payment receive = 7161.7 (1 – 20%) = 5729.36

Year Cash Flow Present Value


0 -30000 -30000
6929.24/(1+5%)1 =
1 1200 + 5729.36 = 6929.24
6599.27
2 6929.24 6929.24/(1+5%)2 =
3 6929.24 6929.24/(1+5%)3 =
4 6929.24 6929.24/(1+5%)4 =
5 6929.24 6929.24/(1+5%)5 =
NPV 0

 Find Lmax (Lessee)


- Cost of machine = 30000
- Depreciation tax shield = -6000 x (1 – 34%) = -2040
1 1
- Discount value = 1 +…+ = 4.3294
( 1+5 % ) ( 1+5 % )5
30000 −2040
 Lmin = 4.3294 (1−34 % ) + 1−34 % = 7408.13
- After tax lease payment receive = 7408.13 (1 – 34%) = -4889.36

Year Cash Flow Present Value


0 30000 30000
-6929.24/(1+5%)1 =
1 -2040 – 4889.36 = -6929.24
-6599.27
-6929.24/(1+5%)2 =
2 -6929.24
-5785.25
-6929.24/(1+5%)3 = -
3 -6929.24
5435.57
-6929.24/(1+5%)4 = -
4 -6929.24
5176.74
5 -6929.24 -6929.24/(1+5%)5 = …
NPV 0

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