User Manual

8. For declining balance depreciation, key in the depreciation factor (as a percentage) and

press

9. Key in the total first lease payment (including any advance payments) and press

1 3 2.

10. Key in the first year's maintenance expense that would be anticipated if the asset was

owned and press

. If the lease contract does not include maintenance, then it is

not a factor in the lease vs. purchase decision and 0 expense should be used.

11. Key in the next lease payment and press

. During any year in which a lease

payment does not occur (e.g. the last several payments of an advance payment contract)

use 0 for the payment.

12. Repeat steps 10 and 11 for all maintenance expenses and lease payments over the term

of the analysis.

Optional - If the investment tax credit is taken, key in the amount of the credit after

finishing steps 10 and 11 for the year in which the credit is taken and press

. Continue steps 10 and 11 for the remainder of the term.

13. After all the lease payments and expenses have been entered (steps 10 and 11), key in

the lease buy back option and press

1 3 43 . If no

buy back option exists, use the estimated salvage value of the purchased equipment at

the end of the term.

14. To find the net advantage of owning press

2. A negative value represents a net

lease advantage.

Example: Home Style Bagel Company is evaluating the acquisition of a mixer

which can be leased for $1700 a year with the first and last payments in advance

and a $750 buy back option at the end of 10 years (maintenance is included).

The same equipment could be purchased for $10,000 with a 12% loan amortized

over 10 years. Ownership maintenance is estimated to be 2% of the purchase

price per year for the first for years. A major overhaul is predicted for the 5th year

at a cost of $1500. Subsequent yearly maintenance of 3% is estimated for the

remainder of the 10-year term. The company would use sum of the years digits

depreciation on a 10 year life with $1500 salvage value. An accountant informs

management to take the 10% capital investment tax credit at the end of the

second year and to figure the cash flows at a 48% tax rate. The after tax cost of

capital (discounting rate) is 5 percent.

Because lease payments are made in advance and standard loan payments are

made in arrears the following cash flow schedule is appropriate for a lease with

the last payment in advance.

Year Maintenance Lease Payment Tax Credit Buy Back

1700 + 1700