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Leasing vs. Buying Farm Machinery

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Presentation on theme: "Leasing vs. Buying Farm Machinery"— Presentation transcript:

1 Leasing vs. Buying Farm Machinery

2 Leasing Terminology Lessee Lessor Initial value Residual value
Lease factor Closed end lease

3 Lease Clauses Usage penalty (hours) Lessee responsibilities Insurance
Fees Taxes Normal maintenance Damage due to abuse or negligence

4 Negotiation Points on Leases
Initial value Lease factor Annual hours

5 Net after Tax Cash Flow See tables 1 and 2

6 Example Parameters - Purchase
$100,000 purchase price $20,000 due at close $80,000 note over 7 years at 12% interest Depreciation on an accelerated table over 7 years

7 Example Parameter - Lease
3 year closed end lease $100,000 initial value $67,165 residual value Lease factor that results in annual payments of $18,665

8 Table 1. Debt-Purchase Analysis
Year A Principal Payments B Interest C Depreciation D Residual Value E $Tax Deductible (B+C-D) F Tax Savings2 (E x .28) G Tax Adjusted Cash Flow H Discount Factor1 (6%) I Discounted Cash Flow (G x H) -20,000 1.00 1 -7,764 -9,182 -10,710 19,892 5,570 -11,376 .943 -10,728 2 -8,749 -8,198 -19,130 27,328 7,652 -9,294 .890 -8,272 3 -9,859 -7,088 -15,030 22,118 6,193 -10,753 .840 -9,033 -53,628 67,165 12,035* 2,407** 11,130 9,349 4 5 6 7 8 Net Present Value of Cash Flows -38,684 *Salvage Value – Book Value 3 1Discount factors are obtained from Table 3 (discount rate table) **(Residual Value – Book Value) x .20 2Marginal income tax rate 3The book value is the purchase price less the accumulated depreciation

9 Table 2. Lease Analysis Year A Lease Payments B Tax Savings (A x .28)
C Tax Adjusted Cash Flow (A – B) D Discount Factor (6%) E Discounted (G x H) -18,665 1.0 1 5,226 -13,439 .943 -12,673 2 .890 -11,960 3 .840 4,390 4 5 6 7 8 9 10 Net Present Value of Cash Outflow -38,908

10 Table 3. Annual Discount Factors
Year 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 1 .943 .935 .926 .917 .909 .901 .893 .885 .877 .870 2 .890 .873 .857 .842 .826 .812 .797 .783 .769 .756 3 .840 .816 .794 .772 .751 .731 .712 .693 .675 .658 4 .792 .763 .735 .708 .683 .659 .636 .613 .592 .572 5 .747 .713 .681 .650 .621 .593 .567 .543 .519 .497 6 .705 .666 .630 .596 .564 .535 .507 .480 .456 .432 7 .665 .623 .583 .547 .513 .482 .452 .425 .400 .376 8 .627 .582 .540 .502 .467 .434 .404 .351 .327 9 .544 .500 .460 .424 .391 .361 .333 .308 .284 10 .558 .508 .463 .422 .386 .352 .322 .295 .270 .247 11 .527 .475 .429 .388 .317 .288 .261 .237 .215 12 .444 .397 .356 .319 .286 .257 .213 .208 .187

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