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450 answers

Disc rate applicable for the company (assumed) 6%

Purchase: Honda CRV LX $ 30,000

Resale value after 5 years $ 10,000

depreciation per year MACRS (as per table)

Tax rate applicable 25%

leasing

Terms $4200 per year for 5 years

Payable at the beginning of every year

No down payment. Car returnable after 5 years

Option 1 Cash outflow in purchase:

Year Particular cash flow PVF @6% PV of cash flow $

0 Purchase price (30000) 1 ( 30000)

1 Tax saving on dep. (cost*MACRS rate*25%)

1 1st year depreciation (1500) 0.943396 (1,415.094)

2 2nd year dep. (3,360) 0.889996 (2,015.0856)

3 3rd year depn. (1440) 0.839619 (1209.05136)

4 4th year dep. (864) 0.792094 (684.369216)

5 5th year dep. (864) 0.747258 (645.63)

5 Salvage value (10,000) 0.74725 (7,472.50)

Net cash Outflow $ 18028 $ (13,441.73)

From initial price (30K)substracting the tax savings associated with depreciation=16558.27$cost

Option 2 Evaluation of leasing option:

Year Particulars cash flow after tax cost PVF @6% PV of cash flow $

0 Yearly Lease payment 4200 1 4,200.00

1 Yearly Lease payment 4200 3150 0.94340 2,971.71

2 Yearly Lease payment 4200 3150 0.89000 2,803.5

3 Yearly Lease payment 4200 3150 0.83962 2644.803

4 Yearly Lease payment 4200 3150 0.79209 2,495.0835

5 Yearly Lease payment 0 3150 0.74726 2,353.869

15750 13268.9655

Substracting from initial price PV of savings associated with lease tax deductions=30000-
13268.9655=16731.03

Conclusion:

As PV of outflow in buying ($13441.73) is lesser than taking the vehicle on lease ($13268.9655), it is
beneficial to buy the vehicle than to go for the lease option.

Other considerations:

a. It may be noted that if due to business reasons, if the company does not want the vehicle, the lease

can be broken with a nominal charge, which is not possible in purchase.

b. In purchasing, maintenance of the vehicle is to be carried by the company, whereas in leasing

the lessor would take care of the maintenance.

c. Other formalities of ownership like registration compliances etc., would not be there in leasing

Selling the vehicle requires time and also spending. Returning the vehicle when lease is over costs
nothing. Considering that costs are somehow similar, the particularities associated with owning versus
leasing may play a big role in final decision.

Note 1:

years pvf@6%

1 0.943396

2 0.889996

3 0.839619

4 0.792094

5 0.747258

total 4.212364 (PVAF=Present value annuity factor)

Note 2: After tax cost of lease payments:

The lease payments are fully deductible for taxation purpose, as it is used

for business purpose.

Lease payment per year $ 4,200

Tax rate 25%

Tax savings on lease payment $ 1050 (4200*35%)

After tax cost of lease payment $ 3150 (4200-1050)

Tax savings are applicable only in the respective year ends.

Note 3: MACRS depreciation:

As per IRS table, for 5 year depreciation, the rate chart is;

Year depreciation rate

1 20%

2 32%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

100%

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