14: Long-Term Debt and Leasing
TABLE 14.6 LEASE VS. PURCHASE ANALYSIS FOR FASTTRAK MOVERS: AFTER-TAX CASH FLOWS ($)
Lease option Purchase option
Lease-
purchase
option
Year
Cost
savings
Lease
payment
Net cash
flow
Purchase
price
Cost
savings
Depreciation
tax shield
Net cash
flow
Net cash
flow
0 $ 0 $ 0 $ 0 –$25,000 $ 0 $ 0 –$25.000 $25,000
1 $2,925 –$4,095 –$1,170 $2,925 $1,750 $ 4,675 –$ 5,845
2 $2,925 –$4,095 –$1,170 $2,925 $1,750 $ 4,675 –$ 5,845
3 $2,925 –$4,095 –$1,170 $2,925 $1,750 $ 4,675 –$ 5,845
4 $2,925 –$4,095 –$1,170 $2,925 $1,750 $ 4,675 –$ 5,845
5 $2,925 –$4,095 –$1,170 $2,925 $1,750 $ 4,675 –$ 5,845
We could reach the same decision by calculating the NPVs of the lease option and the purchase option
separately and choosing the one with the higher NPV.
NPV
$1,170 $1,170
(1.052)
(Lease)= 2 $
(1.052)
$1, 170
(1.052)
15 −− −=−5,037
NPV
$4,675 $4,675 $4,675
(Purchase)= 25, 000 + $4, 871
(1.052)^12 (1.052) (1.052)^5
−+++ =−
The purchase option is $166 [–$5,037 – (–$4,871)] less expensive than the lease option. Because the
purchase option’s NPV is $166 larger and the benefits are the same for both options, the purchase option
is less costly, and therefore FastTrak should purchase the truck rather than lease it. (Note: FastTrak initially
stated that acquiring the new delivery truck would increase company value, so here the company has merely
determined the less expensive method of financing the purchase.)
example
finance in practice
SHOULD I LEASE OR BUY THE CAR?
Once you have done the necessary research, found
the best car to buy and negotiated the lowest
purchase price, you must decide how best to pay
for it. For most buyers, this financing decision
involves a choice between: (1) leasing the car; or (2)
borrowing to buy the car. Let’s assume that you are
buying a new car, have no trade-in, have negotiated
an out-the-door price of $24,500, and that you can
safely earn 5% annual interest net of taxes paid
on that interest. In addition, you have gathered
the following data on the lease and the purchase
alternatives.
Lease
Down payment $2,000
Lease term 48 months
Lease payment $375 per month
Purchase
Down payment $3,000
Loan maturity 48 months
Loan payment $525 per month
Estimated trade-in value of car at
end 48 months
$10,750
