What it calculates

A lease-versus-buy analysis compares the after-tax present value of leasing an asset against owning it, so the choice is made on total economic cost rather than on which monthly figure looks smaller.

How it is calculated

Both paths are reduced to after-tax cash flows and discounted. Buying means the purchase outlay, any financing cost, the tax benefit of depreciation, and the residual value recovered at the end. Leasing means the lease payments, tax-deductible in full, with no residual and no depreciation shield. Because lease payments are relatively certain, the after-tax cost of debt is the usual discount rate rather than WACC.

How to read the result

Compare the net present value of the total cost of each path, and note the residual value assumption, which is where most of the uncertainty sits and which only the buyer bears. Leasing tends to win for assets that obsolete quickly or that you need only for part of their life. Buying tends to win for long-lived assets with predictable residuals and where the depreciation shield is worth something - which requires taxable profit to shield.

Worked example

An asset costs 100,000, is depreciated over five years at a 25% tax rate, and has a 20,000 residual. The lease alternative is 24,000 a year for five years. Discounted at a 5% after-tax cost of debt, the buy path costs roughly 68,600 in present value terms and the lease path roughly 77,900 - so buying is about 9,300 cheaper, entirely dependent on realising that residual.

Common questions

Does leasing still keep the asset off the balance sheet?

No. Under ASC 842 and IFRS 16 nearly all leases over twelve months are recognised as a right-of-use asset and a corresponding liability. The off-balance-sheet argument for leasing has largely gone, which makes the economic comparison the only one that matters.

Why discount at the cost of debt rather than WACC?

Because lease payments are contractual obligations with risk close to that of debt, not equity-like risk. Discounting a near-certain payment stream at a blended equity-inclusive rate understates its present cost.

What if the company has no taxable income?

Then the depreciation shield from owning is worth nothing in the near term, which shifts the comparison sharply toward leasing - or toward a lessor who can use the shield and price some of it back to you.