Financial Models

Run a lease vs. buy analysis

Compare the after-tax cost of leasing and buying equipment with a net present value model, a breakeven discount rate and sensitivities, plus the qualitative factors.

Time
About 45 minutes
Level
Intermediate
Works with
Claude, ChatGPT, Microsoft Copilot, Gemini

What you need

  • Purchase price, useful life and expected salvage value
  • Lease terms: payment, timing, term, buyout or residual, and what's included
  • Financing terms if buying with debt
  • Tax rate, depreciation method and cost of capital

Steps

  1. Collect the quotes and terms.
  2. Paste the prompt and build the model from its structure, or let your AI tool create the workbook.
  3. Confirm the tax treatment with your tax advisor.
  4. Consider the balance sheet effect under lease accounting rules before deciding.

The prompt

Fill in the highlighted brackets
Build a lease vs. buy analysis for [equipment].

Buy: price $[amount], useful life [years], salvage $[amount], financed with [terms, or cash].
Lease: $[payment] per [month/year], paid in [advance/arrears], term [months], buyout or residual $[amount], includes [maintenance, etc.].
Tax rate: [rate]. Depreciation method to assume: [method]. Discount rate (cost of capital): [rate].

Provide:
1. An annual table of after-tax cash flows for each option, including depreciation tax shields, deductible lease payments, maintenance, financing costs and salvage.
2. The NPV of each option, and the discount rate at which they break even.
3. Sensitivity of the result to salvage value and the discount rate.
4. Qualitative factors: flexibility, obsolescence, maintenance burden and covenants.
5. The Excel formulas for the model.

State every tax assumption explicitly so I can confirm it with my tax advisor, since depreciation rules such as bonus depreciation and Section 179 change by year.

Review before you use it

  • A tax advisor confirmed the tax assumptions.
  • Payment timing (advance vs. arrears) is modeled correctly.
  • The discount rate reflects your actual cost of capital.
  • The lease accounting impact on the balance sheet was considered.

Never paste into an AI tool

  • Use a business or enterprise AI plan that does not train on your data, and follow your company's AI policy.

Educational content, not professional advice. AI output can be wrong; review it before relying on it. Disclaimer