When to Lease, When to Buy

Determining whether leasing or buying is better economically (known as lease vs. buy or lease vs. purchase analysis) requires an evaluation of the following:

 
 Purchase cost of the asset
  Rental costs
  Interest rate on a loan if you borrowed to buy the asset (or the cost of capital if you pay cash)
  The expected value of the asset at the end of the lease term, known as the residual value.
 
The cash flows for both leasing and buying are compared, with future payments discounted to reflect the time value of money (i.e., $1 two years from now isn't as valuable as $1 today, since interest can be earned between now and then), and with the tax effect of deductible expenses calculated.
 
Tax calculations are complicated by the fact that the determination of whether a lease is operating or capital for tax purposes (called by the IRS a "true lease" and a "conditional sales contract," respectively) is not always the same as the determination for book purposes; some of the rules are different, and some require judgment calls, rather than the bright lines used in FAS-13
 
We can help you perform a Lease Vs. Buy Analysis
 
Financial Computer Systems makes available a Lease vs. Buy module as part of our lease accounting service (coming soon to our EZ13 PC software). This module can easily pay for the cost of our software or service, by showing you when a lease is a good deal and when the lessor is trying to take you for a ride. Leases often have interest rates over 20% built into them (especially for rapidly obsolescent equipment like computers), which is probably not a good situation for you, unless you have no way of getting the money to buy an asset you need.
 
But if you're armed with the facts from our Lease vs. Buy module, you're in a stronger bargaining position with your lessor, which can help you get the most for your money.