Leasing v/s Owning

Leasing Equipment Leasing business equipment and tools preserves capital and provides flexibility, but it may cost you more in the long run. Buying Equipment Ownership and tax breaks make buying business equipment appealing, but there are high initial costs. When deciding whether to buy or lease a particular piece of business equipment, approximate net cost of that asset factor in tax breaks resale value After determining which option is more cost-effective, consider other intangibles: When the product will become obsolete (if you are considering purchasing) your need for the product will expire before the lease does (if you are considering leasing).

Example
A 3yr lease on a computer worth Rs40,000, at a standard rate of Rs 400/month per Rs10,000, will cost a total of Rs 50,760. If one had bought it outright, one would have paid only Rs 40,000. In addition to the higher cost, you will have built up no equity in the computer.

Steps to make decision:

Step 1: Estimate post tax cash flows
LR(1-Tc)
Where:
LR Lease Rental Tc Tax rate I interest portion of the hire rate PR Principal Repayment D Depreciation NSV net salvage value

or

-I(1-Tc) PR+ D(Tc) + NSV

Step 2: Calculate the present value of cash flows and choose the one with the lower present value.

Example
Given:
Primary lease period: 5yrs @ Rs 300 per 1000 per year. Secondary Lease Period: 5yrs @ Rs 12000 per yr. Asset will be taken back after secondary lease period. Net salvage value Rs 1,00,000 Post tax cost of debt 8% Tax rate 50%

Cont
Therefore, Present Value of the lease:
Rs. 6,15,265

Present value of Hire Purchase:

Rs. 5,87,124

Thus, since present value cost of the hirepurchase option is lower, we will prefer the hire purchase option.