Lease Versus Buy

Advantages of Leasing:	Disadvantages of Leasing
Availability of cash Financial flexibility Additional tax deductions Source of financing Low risk of obsolescence Stability of cost Spatial flexibility/mobility Technology Location Focus	Cost Loss of asset's salvage value Contractual Penalties Appreciation Control Operational Control Changes
Advantages of Owning:	Disadvantages of Owning:
Tax Savings Appreciation Income Control	Initial Capital Outlay Financing, Financial Liability Legal Compliance Risks Health and Safety Liability Inflexibility

Methods of Comparing Leasing and Owning Cost

Present Value Method:

Input the cash flows for each alternative and solve for present value using the appropriate discount rate.
Compare the resulting present value amounts and choose the best option on the lower cost.

Internal Rate of Return Analysis:

• Determine the after tax cash flows for both the lease and own alternative.
• Subtract the periodic cash flows of one alternative from those of the other to get a differential cash flow for each period.
• Calculate the internal rate of return on the differential cash flows for the holding period. 
• Compare the resulting internal rate of return with the decision-maker’s opportunity cost.
• Remember, comparing the respective cost of leasing and buying is not an indicator of which option to choose. The best option may be to incur the higher relative costs of buying to gain advantages of ownership.

Remember, comparing the respective cost of leasing and buying is not an indicator of which option to choose.  The best option may be to incur the higher relative costs of buying to gain advantages of ownership.