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Lease Versus Buy

The LvB is a comparative analysis of two different acquisition models: an asset purchase or a lease. The comparison between the two is done by discounting the corresponding after-tax cash flows for each scenario. The purchase scenario is further bifurcated into two components, one assuming the use of cash on hand and the other assuming that cash is borrowed. The split between cash on hand and borrowed funds is based on the debt weight assigned to the Lessee in the system. The value in running an LvB is to make sure you are making the most effective financial decision when acquiring an asset. By having the LvB functionality integrated into your Enterprise lease accounting system, you also have the opportunity to use it as an early “warning” signal and alert your accounting team that there may be a new lease transaction about to be executed. 

The system is very flexible, and the client will elect which rate to use for the discounting of the different cash flows that are part of the LvB analysis. The choices are Debt, Equity, or WACC (Weighted Average Cost of Capital). As this functionality is a comparative analysis, it is highly advisable that the same rate is selected for every cash flow. The best practice suggestion is to use the WACC, as that is the typical rate companies use for capital allocation decisions. As such, LeaseAccelerator defaults all clients to use WACC. If a client wants to use Debt or Equity, they must submit a ticket to have the rates changed and populate the LvB Settings tab of a CIW to include with the request.​

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What Is Needed to Generate an LvB

In order to generate an accurate Lease Versus Buy Analysis, clients should have the following metadata configured in their environment. Please note that while some of these may be entered for each LvB Analysis, it is best practice to have this configured in your Settings for consistency between each analysis.

  • Lessee Rates: Clients likely already have IBR, but you need Debt and Equity Rates for accurate and easy LvB results. If configured, these will auto-populate based on the Lessee, Country, and Term you input in the LvB tiles.​

    • Debt Rate: Represents the rate at which you can borrow funds through a loan.​ When configuring, Debt Rate must be greater than 0.000001. It cannot be 0.

    • Equity Rate: Represents the compensation the market demands in exchange for owning the stock and bearing the risk of ownership.​ When configuring, Equity Rate must be greater than 0.000001. It cannot be 0.

  • Tax Rates: Need both Federal and State (where applicable) in order for this to auto-populate when generating an LvB.​

  • Lessee Info: Clients will need their Lessee Info pre-configured in Settings prior to generating an LvB.

    • Debt Weight: Debt Weight is the most important factor, specifically because LA defaults to use WACC for cash flows. In order to calculate WACC, LA needs the Debt Weight, Equity Rate, and Debt Rate. 

    • Fiscal Calendar: Needed to determine accurate cash flows.

  • Tax Depreciation Method: Each country (Geo) that you do business in must have unique entries for the Tax Depreciation Method so that the calculations can be aligned appropriately with the tax rate information entered in the Tax Rate table.

    • It is inappropriate to select all countries when setting your Depreciation Methods. You should only indicate countries you have configured as Geos.

Note:

  • The ‘Lease Net Cash Flows’ are dependent on the Lease Payment, State and Federal Tax.​

  • The ‘Buy Net Cash Flows’ are dependent on the Asset Cost, WACC, Depreciation, Salvage Value, and State and Federal Tax.​

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