Leasing vs. Buying Farm Machinery

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Presentation transcript:

Leasing vs. Buying Farm Machinery

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

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

Negotiation Points on Leases Initial value Lease factor Annual hours

Net after Tax Cash Flow See tables 1 and 2

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

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

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

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

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