Lease vs Buy Equipment Decision Analyzer
Compare equipment lease vs purchase with total cost of ownership, residual value, and full cash-flow timeline for procurement decisions.
Worked Examples
Example 1: Company Vehicle - Lease Wins
Problem:Delivery van: $45,000 purchase price, $5,000 down, 6% loan over 5 years. Lease: $700/month for 3 years. Residual value: $12,000. Maintenance: $2,500/year. Tax rate: 25%.
Solution:BUY Analysis:\n- Down payment: $5,000\n- Loan: $40,000 at 6% for 60 months\n- Monthly payment: $773\n- Total payments: $46,380\n- Total interest: $6,380\n- Maintenance (5 years): $12,500\n- Tax benefits (depreciation + interest): ~$10,000\n- Residual value: $12,000\n- Net cost: $5,000 + $46,380 + $12,500 - $10,000 - $12,000 = $41,880\n\nLEASE Analysis:\n- Monthly: $700 × 36 = $25,200\n- Tax benefit: $25,200 × 25% = $6,300\n- Net cost: $25,200 - $6,300 = $18,900\n\nBut lease is only 3 years vs buy's 5 years. Annualized:\n- Buy: $41,880 / 5 = $8,376/year\n- Lease: $18,900 / 3 = $6,300/year\n\nLeasing costs less per year AND avoids obsolescence risk for delivery vehicles.
Result:LEASE: $6,300/year | BUY: $8,376/year | Lease saves $2,076/year
Example 2: Manufacturing Equipment - Buy Wins
Problem:CNC machine: $150,000. Buy: $30,000 down, 7% for 5 years. Lease: $3,500/month for 5 years. Residual: $50,000. Maintenance: $3,000/year. Tax rate: 30%.
Solution:BUY Analysis:\n- Down payment: $30,000\n- Loan: $120,000 at 7% for 60 months\n- Monthly payment: $2,376\n- Total payments: $142,560\n- Interest: $22,560\n- Maintenance: $15,000\n- Tax benefits: ~$37,000 (depreciation + interest)\n- Residual: $50,000\n- Net cost: $30,000 + $142,560 + $15,000 - $37,000 - $50,000 = $100,560\n\nLEASE Analysis:\n- Total payments: $3,500 × 60 = $210,000\n- Tax benefit: $210,000 × 30% = $63,000\n- Net cost: $210,000 - $63,000 = $147,000\n\nBuying saves $46,440 over 5 years.\n\nWhy buy wins: Strong residual value, long useful life, lower total payments.
Result:BUY: $100,560 | LEASE: $147,000 | Buy saves $46,440
Example 3: Office Technology - Lease for Flexibility
Problem:Server infrastructure: $80,000. Buy: $16,000 down, 8% for 4 years. Lease: $2,200/month for 3 years. Residual: $8,000 (technology depreciates fast). Tax rate: 25%.
Solution:BUY Analysis:\n- Down: $16,000\n- Loan: $64,000 at 8% for 48 months\n- Monthly: $1,562\n- Total payments: $74,976\n- Interest: $10,976\n- Tax benefits: ~$20,000\n- Residual: $8,000 (may be optimistic for tech)\n- Net cost: $16,000 + $74,976 - $20,000 - $8,000 = $62,976\n- Risk: Technology may be obsolete before 4 years\n\nLEASE Analysis:\n- Total: $2,200 × 36 = $79,200\n- Tax benefit: $79,200 × 25% = $19,800\n- Net cost: $59,400\n- Benefit: Upgrade to new technology in 3 years\n\nLease wins slightly ($3,576) AND provides technology refresh. If residual is actually $0 (obsolete), buy net cost = $70,976, making lease clearly better.
Result:LEASE: $59,400 | BUY: $62,976 | Lease wins + flexibility benefit
Frequently Asked Questions
When is leasing better than buying equipment?
Leasing is typically better when: (1) Technology changes rapidly (obsolescence risk), (2) Cash flow is tight (preserve capital), (3) The equipment has poor residual value, (4) Maintenance is included in lease, (5) You need flexibility to upgrade, (6) Tax benefits of deducting lease payments exceed depreciation benefits. Leasing also keeps debt off balance sheet in some accounting treatments.
How does residual value affect the decision?
Higher residual value favors buying—you recoup more at the end. Residual value depends on: equipment type (vehicles vs. computers), brand (premium brands hold value), maintenance history, and market demand. Research resale values for your equipment type. If residual is uncertain or low, leasing transfers that risk to the lessor.
What is the true cost of a lease?
True lease cost includes: all monthly payments, any upfront fees, excess mileage/usage charges, wear-and-tear penalties, early termination fees, and missed tax benefits of ownership. Compare this total (minus tax deductions) to the net cost of buying. Many lessees underestimate true cost by ignoring end-of-term charges.
What is a capital lease vs. operating lease?
Capital (finance) lease: treated like ownership for accounting; asset and liability go on balance sheet. Operating lease: treated as rental; only lease payments recorded. Under ASC 842/IFRS 16, most leases now appear on balance sheet. Distinction affects financial ratios and may matter for loan covenants or financial reporting.