Financial
Lease vs. Buy NPV calculator: Net Advantage to Leasing (NAL) after taxes
Explore a simplified annual lease-versus-purchase cash-flow model with assumed usable tax relief, zero residual value and end-of-year payments.
State the cash-flow assumptions before comparing lease and buy
This teaching model assumes full straight-line tax depreciation over B2 whole years, immediately usable deductions at C2, deductible lease rentals, zero residual value and equal maintenance costs. Annual rent is paid at each year end. Fees, deposits, purchase options, unequal maintenance, financing constraints and jurisdiction-specific tax rules are omitted.
The discount rate E2*(1-C2) is an assumed after-tax debt rate for this model, not a universally correct rate. Leasing avoids the initial purchase cost but incurs after-tax rentals and forgoes the assumed depreciation tax savings. A positive modeled net advantage favors leasing under these inputs; it is not a general purchase recommendation.
| Lease vs. Buy Component ($120k Asset, 4 yrs, 25% Tax, 8% Debt) | Formula | Cash Flow / PV |
|---|---|---|
| After-Tax Discount Rate | 8.0% * (1 - 25%) | 6.00% / year |
| Annual Lease Outflow + Lost Tax Shield | $34k*(1-0.25) + ($120k/4)*0.25 | $25,500 + $7,500 = $33,000/yr |
| Net Advantage to Leasing (NAL) | $120,000 + PV(6%, 4, $33,000) | +$5,651.51 modeled advantage to leasing |
Compute Net Advantage to Leasing (NAL)
A2=AssetCost, B2=Years, C2=TaxRate, D2=AnnualLease, E2=PreTaxDebtRate. Positive NAL favors leasing.
=IF(OR(COUNT(A2:E2)<>5,A2<=0,B2<=0,B2<>INT(B2),C2<0,C2>1,D2<0,E2<0),"Invalid inputs",LET(rd, E2 * (1 - C2), pmtOut, D2 * (1 - C2) + (A2 / B2) * C2, ROUND(A2 + PV(rd, B2, pmtOut), 2)))Label the modeled comparison, including break-even
Compare the NAL rounded to cents: positive is Lease, negative is Buy, zero is Indifferent. The label inherits all model assumptions.
=IF(OR(COUNT(A2:E2)<>5,A2<=0,B2<=0,B2<>INT(B2),C2<0,C2>1,D2<0,E2<0),"Invalid inputs",LET(discountRate,E2*(1-C2),annualOutflow,D2*(1-C2)+(A2/B2)*C2,advantage,ROUND(A2+PV(discountRate,B2,annualOutflow),2),IF(advantage>0,"Lease",IF(advantage<0,"Buy","Indifferent"))))Try the example
Use the original values or change them to test your understanding.