Lease vs. buy calculator: How to make the best financial decision

Purpose of a lease vs. buy calculator

A lease vs. buy calculator is your ally when deciding whether to lease or buy an asset. 

It’s a clear, data-driven way to compare the total cost of leasing versus buying over time, factoring in monthly payments, tax deductions, maintenance expenses, and more. 

This framework helps you cut through the noise and see the numbers that matter for optimizing cash flow, understanding potential returns, and making the most financially sound choice for your business. 

With easy-to-understand breakdowns, you can isolate each item for optimization and safeguard against unexpected costs or overlooked details. 

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Leasing assets 

Leasing assets can be a strategic move for businesses looking to maintain cash flow flexibility while still accessing essential equipment or property. 

It’s a great way to get what you need to drive business without the hefty upfront investment. But like any financial decision, leasing comes with its own advantages and drawbacks. 

Here’s a closer look:

Pros of leasing assets

• Lower initial costs make leasing an appealing option, as it preserves cash flow for other operational needs.
• Greater flexibility in leasing agreements allows you to upgrade or change easily, making it simple to evolve with business needs or technological advancements.
• Tax benefits come from lease payments being tax-deductible as a business expense, offering potential savings.
• Reduced maintenance costs often come with leasing, as many agreements include repair and servicing covered by the lessor.
• No depreciation risks mean you avoid the financial hit of equipment depreciation and declining asset value since you’re not tied to ownership.

Cons of leasing assets 

• Higher long-term costs can add up, as the total expense of leasing over time may exceed the asset’s purchase price.
• No ownership at the end of the lease means you won’t have any equity in the asset, which could limit long-term value-building for your business.
• Limited customization options are often part of leasing agreements, restricting how you can tailor assets to fit your specific needs.
• Potential fees for early termination or exceeding usage limits can lead to unexpected costs that increase the overall expense of leasing.
• Dependency on the lessor for repairs, upgrades, or replacements can affect your operations if service is slow or inconsistent.

Buying assets

Buying assets can be a strategic move that gives you long-term value, control, and potential appreciation. 

It’s often the go-to option for businesses looking to build equity and gain more customization options. However, purchasing also requires careful cash flow forecasting due to higher upfront costs and potential maintenance responsibilities. 

Here’s an overview of the advantages and challenges of buying assets:

Pros of buying assets

• Full ownership means you build equity over time, turning the asset into a valuable business investment.
• Greater control allows for full customization and gives you the freedom to modify and optimize the asset according to your needs.
• Potential for asset appreciation can provide financial gains, especially if the asset’s market value increases over time, such as real estate property. 
• No recurring lease payments offer more predictability in financial planning, as you avoid ongoing monthly costs. 
• Tax benefits like depreciation allow you to claim deductions over the asset’s useful life, reducing taxable income. 

Cons of buying assets 

• Higher upfront costs can strain cash flow through a significant capital investment injection at the point of purchase.
• Maintenance and repair costs become your responsibility, adding to the total expense and time needed to manage the asset.
• Depreciation risks mean the asset may lose value over time, affecting its resale potential and the return on investment.
• Limited flexibility can be a downside, as it’s harder to upgrade or replace owned assets without additional costs.
• Tied-up capital can restrict liquidity, making it more challenging to allocate resources for other business opportunities or needs.

How to do a lease vs. buy analysis

Conducting a lease vs. buy analysis isn’t just about comparing costs—it’s about understanding how each choice aligns with your business goals. 

Using a lease vs. buy calculator takes assumptions and guesswork out of the process, offering a clear comparison of financial impacts over time. Here’s how to do it:

1. Determine the net present value of leasing

Calculating the net present value (NPV) of leasing involves understanding the total cost of lease payments over the lease term, adjusted for the time value of money. 

To get started, estimate the expected lease payments, maintenance costs (if any), and potential tax deductions. Then, use the discount rate that matches your company’s cost of capital to find the present value. 

Leasing NPV = (total lease payments + maintenance costs – tax deductions) / (1 + discount rate) ^ number of periods

This calculation reveals the real cost of leasing and helps you see how it impacts cash flow and tax planning over time.

2. Calculate the net present value of buying 

The NPV of buying focuses on the long-term financial impact of owning an asset. 

Start by adding up the initial purchase price, expected maintenance costs, and any tax benefits, such as depreciation deductions, over the asset’s useful life. Adjust these cash flows using the same discount rate applied in the leasing analysis. 

Buying NPV = (purchase price + maintenance costs – tax deductions + residual value) / (1 + discount rate) ^ number of periods

This NPV calculation gives a clear view of the total cost of ownership and shows whether the investment is affordable and beneficial. 

3. Compare the NPV of leasing vs. buying

With both NPVs in hand, you can directly compare the financial outcomes of leasing versus buying. A higher NPV indicates a more cost-effective option. For example, if the NPV of leasing is $80,000 while the NPV of buying is $90,000, buying may be the better option financially, as it involves a higher value overall. 

4. Consider other factors 

While NPV is a crucial part of the decision, other factors play a role in a well-rounded analysis. 

For example, if you don’t have the investment capital at hand, you might need to opt for a lease as it requires a lower up-front payment. 

Similarly, while assets like real estate may appreciate and provide long-term returns, others, such as equipment or technology, typically depreciate. If the potential appreciation is low, leasing could be more cost-effective.

Finally, consider the strategic flexibility. Leasing can be advantageous when your business is rapidly growing or undergoing changes, as it allows for easier adjustments.

To simplify your lease vs. buy analysis, download our free lease vs. buy calculator today and get a comprehensive breakdown of costs, tax benefits, and long-term impacts.

More about lease vs. buy calculators 

Here are some of the more common questions and answers about the leasing and buying process.

How do you calculate a lease or buy decision?

To calculate a lease or buy decision, compare the total cost of leasing versus buying over the asset’s useful life. Include factors like monthly payments, upfront costs, tax benefits, and residual values. Use NPV calculations to adjust for the time value of money, revealing which option has a lower present cost.

Is leasing a better option than buying?

Leasing is often better for businesses needing flexibility, lower initial costs, and the ability to upgrade frequently. It’s ideal when conserving cash flow or avoiding ownership risks is a priority. However, buying might be superior if asset appreciation, long-term use, and equity-building are more aligned with your goals.

Is it worth it to lease and then buy out?

Leasing with a buyout option can be worthwhile if your business wants to test an asset before committing to ownership. It keeps the initial investment low and usually allows the lessee to purchase the asset at a reduced rate later. 

However, the total cost can be higher compared to buying outright, so evaluate this option carefully.

Do you lose more money leasing or buying? 

Whether you lose more money leasing or buying heavily depends on the asset type, usage, and ownership period. 

Leasing may lead to higher long-term costs but provides more flexibility, lower initial expenses, and less risk of depreciation. However, the lack of ownership means no asset equity is built over time, which can limit long-term financial gains. 

Buying can offer cost savings through depreciation and potential appreciation, making it a better investment for long-term use. On the downside, it requires more capital upfront and carries maintenance and obsolescence risks.

Make the right financial choice with a lease vs. buy calculator

Choosing whether to lease or buy an asset can be challenging, but the right tools make the decision much clearer. 

Our lease vs. buy calculator simplifies complex financial comparisons and offers clear insights into costs, tax benefits, and potential returns. 

Netgain knows busy teams have much more on their plate, which is why we offer accounting solutions for both leased and purchased assets.

If you decide to lease, NetLease has your back with automated compliance with leasing standards and comprehensive lease reporting, with a version embedded in NetSuite and a version for any ERP.

If buying is the better choice for your business, simplify your fixed asset management with NetAsset’s automated depreciation schedules, advanced reporting, and CIP build-ups. NetAsset is also available for any ERP.

Ready to see how it works? Reach out to our team for a personalized demo today.