Evaluate the true after-tax cash flow impact of leasing vs. purchasing corporate assets using NPV analysis. All calculations run instantly in your browser.
Equipment and Corporate Tax Profile
Buy (Finance) Scenario
Lease Scenario
Optimal Decision (Net Present Value of Cost)
--
Enter your figures above to see the recommendation.
Buy / Finance
🏦
Purchase with Loan
--
NPV of Total Cost
Total Nominal Outlay--
Lease
📋
Operating Lease
--
NPV of Total Cost
Total Nominal Outlay--
Year-by-Year Cash Flow Breakdown
Year
Buy: Loan Pmt
Buy: Tax Shield
Buy: Net Outflow
Buy: PV
Lease: Annual Cost
Lease: Tax Shield
Lease: Net Outflow
Lease: PV
For informational purposes only. This tool uses straight-line depreciation and assumes an operating lease structure. It does not account for accelerated depreciation (MACRS/Section 179), balloon payments, purchase options, or state/local tax differences. Consult a CPA or financial advisor before making capital asset decisions.
Advertisement
Key Terms Explained
Net Present Value (NPV)
The sum of all future cash flows discounted back to today's dollars. A lower NPV of cost means the option is cheaper in real terms, regardless of when the payments fall.
WACC / Discount Rate
Weighted Average Cost of Capital. The blended rate a company pays for its financing (debt + equity). Used to discount future cash flows because money today is worth more than the same amount received later.
Depreciation Tax Shield
The reduction in taxes owed because depreciation is a non-cash deduction from taxable income. For example, $20,000 of depreciation at a 21% tax rate saves $4,200 in cash taxes annually.
Operating Lease vs. Capital Lease
An operating lease is essentially a rental arrangement - payments are fully deductible and the asset stays off your balance sheet. A capital (finance) lease treats the asset as owned, requiring depreciation but also granting ownership rights or purchase options.
Salvage Value
The estimated resale or scrap value of an asset at the end of its useful life. Under the buy scenario, salvage value is a cash inflow in the final year that reduces total ownership cost.
Amortization
The gradual payoff of a loan through regular scheduled payments. Each payment covers accrued interest first, with the remainder reducing the outstanding principal balance.
Straight-Line Depreciation
A method that spreads the depreciable cost (purchase price minus salvage value) evenly over the asset's useful life. Simple and conservative; actual tax depreciation under MACRS is often faster.
Interest Expense
The portion of each loan payment that compensates the lender for the use of money. Interest is tax-deductible for businesses and decreases as the loan balance is paid down.
The Complete Guide to Equipment Lease vs. Buy Analysis
When your business needs a piece of equipment, whether it's a commercial printer, a CNC machine, a company vehicle, or an IT server rack, you face one of the most consequential financing decisions in corporate finance: should you buy it outright (or finance it), or should you lease it? The answer depends on far more than the monthly payment figure on the lease quote. True decision-making requires comparing the after-tax, discounted cost of every dollar you will pay over the life of the asset.
How to Use This Calculator
Start with the Equipment and Corporate Tax Profile panel. Enter the asset's purchase price, how many years you plan to use it, its estimated resale or scrap value at end of life, your effective corporate tax rate, and your company's cost of capital (WACC or a proxy rate). The tool uses these values in both scenarios.
In the Buy panel, enter your expected down payment percentage, the loan's annual interest rate, and the loan term. In the Lease panel, enter the monthly lease payment and the length of the lease. All results update in real time. The Year-by-Year table lets you audit every number in the model.
How the Math Works
Both scenarios use the same NPV framework. Each year's net cash outflow is divided by (1 + WACC)^year to convert it into present-value dollars, then all years are summed. The scenario with the lower NPV of cost is the cheaper option in real terms.
For the buy scenario, the annual loan payment is calculated using a standard amortization formula. Each year, the interest portion is isolated and added to that year's depreciation deduction. Multiplied by the tax rate, this produces the combined tax shield, which is subtracted from the gross loan payment to get the true net outflow. In the final year, the salvage value is also deducted. The down payment is added as a Year 0 cost.
For the lease scenario, the annual lease cost equals 12 times the monthly payment. Because operating lease payments are typically fully deductible, the entire annual payment multiplied by the tax rate yields the shield. The net outflow is the annual cost minus that shield.
Strategic Factors Beyond the NPV
A quantitative advantage for buying does not always mean buying is correct. Consider: if your company needs to preserve cash or credit capacity for higher-return projects, a lower down payment lease may free capital that generates more than the NPV gap. For technology assets with rapid obsolescence (copiers, servers, forklifts), leasing lets you upgrade at lease-end without dealing with the resale market. And if your business has net operating loss carryforwards or other deductions that already eliminate taxable income, the depreciation shield from buying is worthless until profitability is restored.
Conversely, for assets with strong residual values (real estate equipment, certain machinery), ownership accretes value that leasing never captures. And over long holding periods, the cumulative tax benefit of depreciation plus interest deductions typically outweighs lease deductions even before accounting for ownership.
Frequently Asked Questions
Why do we discount future cash flows using NPV?
A dollar paid today costs more than a dollar paid in the future because of the time value of money. If your company could invest that dollar at an 8% return (your WACC), receiving it later is worth less in today's terms. NPV discounts all future cash outflows back to the present so you can compare the true cost of leasing vs. buying on an apples-to-apples basis. Without discounting, a 5-year lease might appear more expensive than buying even when it is actually cheaper in present value terms.
How does corporate tax rate affect the lease vs. buy decision?
Both scenarios generate tax deductions that reduce your real cost. When you buy, you deduct depreciation and loan interest each year. When you lease an operating lease, you deduct the full lease payment. The higher your corporate tax rate, the larger these shields are, and the more both options benefit. However, if your company has very high taxable income, owning the asset and claiming accelerated depreciation (not modeled here, which uses straight-line) can produce a larger early shield than leasing does.
What happens to the equipment at the end of a lease?
Under a true operating lease, the equipment is returned to the lessor at the end of the lease term. You do not own it and receive no salvage value. Under a capital (finance) lease, you typically have an option to buy the asset for a nominal amount or it transfers to you automatically. This calculator models the operating lease scenario, where no residual value accrues to your company. The buy scenario includes the full salvage value as a cash inflow in the final year, which often tips the scales toward ownership for long-lived assets with high resale value.
Is it always better to own business assets?
Not at all. Leasing beats buying in several common situations: when capital is scarce and the down payment would otherwise fund higher-return projects; when the asset depreciates rapidly or becomes obsolete quickly (technology, vehicles); when the company has low or no taxable income and cannot use depreciation shields effectively; or when off-balance-sheet treatment matters for debt covenants. The NPV analysis in this calculator quantifies the financial difference so you can weight it against these strategic factors.
What discount rate should I use for the WACC field?
Use your company's Weighted Average Cost of Capital (WACC), which blends the after-tax cost of debt and the expected return on equity, weighted by your capital structure. For small businesses without a formally calculated WACC, a reasonable proxy is your average borrowing rate or the return you expect your cash to earn if left invested. Common values range from 6% to 12% for established SMBs and 8% to 15% for higher-risk growth companies. A higher discount rate makes near-term payments hurt more and future payments matter less.