This method begins with an estimate of taxable income. This figure, the net after tax cash flow, is calculated for each year in the life of the equipment. Thus, if the lease would be for 3 years, it is assumed that purchased equipment would be sold after 3 years and the amount received added to the net after tax cash flow. Capital gains taxes on any gain above the book value also must be considered. Because the annual net after tax figure for buying or leasing will differ over the evaluation period, each annual figure must be discounted back to the initial point of the purchase or lease.
Many analyses use the current rate of inflation as the discount rate.
To illustrate the analysis method, two scenarios are depicted in Tables 1 and 2. Depreciation is over 7 years using an accelerated schedule. The purchase option is based on an equipment life of 3 years, which is the end of the lease period. Subsequent data is reflective of the cost information gathered at the end of each successive year of the analysis. The process considers the cash outflow of interest and principal and deductions for depreciation.