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What are the best practices for conducting lease vs buy analysis in Excel?

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When you need to acquire an asset for your business, such as equipment, vehicles, or property, you have two main options: leasing or buying. Leasing means paying a periodic fee to use the asset for a specified term, while buying means paying the full cost upfront or financing it with a loan. How do you decide which option is better for your cash flow, profitability, and tax situation? One way to compare them is to conduct a lease vs buy analysis in Excel. This article will show you the best practices for creating a spreadsheet that calculates the net present value (NPV) and the internal rate of return (IRR) of both options, and helps you make an informed decision.

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1 Set up the inputs

The first step is to gather the relevant data and assumptions for both options, such as the purchase price, the lease rate, the term, the residual value, the depreciation method, the tax rate, and the discount rate. You can enter these inputs in separate cells or tables in Excel, and label them clearly. You can also use data validation, conditional formatting, and cell protection to ensure the accuracy and consistency of your inputs.

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Shreyansh S.

Associate Partner at Shree Legal Associate || Head Editor & Founder at LAWLOVELEGAL || Experienced in Commission Sales || Passionate Blogger || LLB & LLM in Constitutional & Administrative Law ||
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1. Comprehensive Data Collection: Gather detailed information on lease and purchase costs, including rent, utilities, maintenance, and financing terms. 2. Clear Assumptions: Define clear assumptions for key variables like interest rates, occupancy rates, and property appreciation. 3. Sensitivity Analysis: Conduct sensitivity analysis to understand how changes in assumptions impact the outcome of the analysis. 4. Discounted Cash Flow (DCF) Analysis: Use DCF analysis to compare the present value of lease payments with the present value of ownership costs over the analysis period. 5. Scenario Analysis: Evaluate multiple scenarios, such as different lease terms or financing options, to understand their impact on the decision.

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2 Calculate the cash flows

The next step is to calculate the cash flows for both options over the same period, usually the lease term or the useful life of the asset. For the lease option, the cash flows are the lease payments, which are usually fixed and paid at the beginning or the end of each period. For the buy option, the cash flows are the initial outlay, which is the purchase price minus any loan amount, and the loan repayments, which include principal and interest. You also need to factor in the tax implications of both options, such as the tax savings from depreciation and interest expenses for the buy option, and the tax deductions from lease payments for the lease option. You can use Excel formulas, functions, and tables to calculate the cash flows for both options, and display them in a clear and logical format.

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Jon Moyer

Director, Acquisitions @ Bendetti | Industrial Real Estate Investments
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The lease analysis portion needs to include any tenant improvement proceeds that would be received from the Landlord for occupying the space. On the buy side those proceeds would be paid for by the buyer.

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Tim Bristow

Senior Vice President Market Development /Strategy | BA in Political Science
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It’s extremely important when considering Lease vs Own that you run multiple scenarios or a sensitivity analysis with various discounted cash flows , interest rate and inflationary considerations . In the last 24 months we have seen a significant jump in interest rates , construction costs and utilities along with tighter loan to value thresholds from lenders . It’s best to be be disciplined and conservative so you don’t look back and see your deal is suddenly under water and fell outside of your Best and Worst case margins in your original proforma.

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3 Compare the NPV and IRR

The final step is to compare the NPV and IRR of both options, which are two common financial metrics that measure the profitability and efficiency of an investment. The NPV is the difference between the present value of the cash inflows and the present value of the cash outflows, using a discount rate that reflects your opportunity cost of capital. The IRR is the discount rate that makes the NPV equal to zero, or the annualized return on your investment. You can use Excel's NPV and IRR functions to calculate these metrics for both options, and compare them to see which one has a higher NPV and IRR. Generally, the option with a higher NPV and IRR is the better choice, as it means you are paying less and earning more from the asset.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the best practices for conducting lease vs buy analysis in Excel?

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1 Set up the inputs

2 Calculate the cash flows

3 Compare the NPV and IRR

4 Here’s what else to consider

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