lease vs buy analysis.xls
DESCRIPTION
gggTRANSCRIPT
UN-3B
EQUIVALENT LOAN METHODAsset cost 600,000Interest rate 12%Lease rental payment 140,000Annual depreciation 100,000Tax rate 40%Residual Value 150,000 Lease Term (years) 6 (advance payment)
Year 0 1 2 3 4 5 6
After-tax cash flows from leasingAfter-tax lease rental -84,000 -84,000 -84,000 -84,000 -84,000 -84,000 -84,000
After-tax cash flows from buying the asset using bank loanAsset costInterest Exp -43,200 -43,200 -43,200 -43,200 -43,200 -643,200Depreciation tax shield 40,000 40,000 40,000 40,000 40,000 40,000Residual Value 90,000Net cash from buying -3,200 -3,200 -3,200 -3,200 -3,200 -513,200
Differential cash flow: Lease saves lessorLease minus buy -84,000 -80,800 -80,800 -80,800 -80,800 -80,800 429,200
NPV (Leasing) (397,929.15)NPV (Buy) ($351,207.32)Decision??
A B C D E F G H
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
UN-3B
Asset cost 600,000Interest rate 12%Lowest acceptable lease paymen 140,000Annual depreciation 100,000Tax rate 40%Lease term (years) 6 (advance payment)
Year 0 1 2 3 4 5 6
Lessor after-tax cash flows from leasingAfter-tax lease rental
Lessor after-tax cash flows from buying the assetAsset costDepreciation tax shieldNet cash from buying
Lessor cash flowsLease + buy
IRR of cash flow
THE LESSOR'S PROBLEMCalculating the lowest acceptable lease rate
A B C D E F G H
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
BASIC LEVERAGED LEASE EXAMPLE
Cost of asset 1,000,000Lease term 15Residual value 300,000 <-- Realized year 16Equity 200,000Debt 800,000 <-- 15-year term loan, equal payments of interest and principalInterest 10%Annual debt payment 105,179 #VALUE!Annual rent received 110,000 Tax rate 40%
Year Depreciation Interest
0123456789
10111213141516
IRR of cash flows
Equity Invested
Rental or salvage
Principal at start of
yearLoan
payment
BASIC LEVERAGED LEASE EXAMPLE
<-- 15-year term loan, equal payments of interest and principal
IRR of cash flows
Repayment of principal
Cash flow to equity