Lease, Loan & Or Buy Outright

It depends on your discount rate (cost of capital), tax rate, the resale residual and how long you will keep the machine. The cheapest route in present-value terms is the one with the lowest after-tax discounted cash outflow. Buying outright wins when you have idle cash and the machine holds a high residual; leasing wins when capital is scarce and your discount rate is high; financing sits between the two. This calculator computes all three and crowns the cheapest.

PV cost = Σ over each year of (after-tax cash paid − tax shields gained − resale residual recovered) ÷ (1 + d)ᵗ, where d is your discount rate and t is the year. Owners (cash or loan) get the depreciation tax shield and the residual; lessees deduct their rentals but own nothing, so they recover no residual. The loan payment is the annuity EMI = P·i ÷ (1 − (1+i)⁻ⁿ).

Two machines at the same price can cost very different amounts to acquire once you account for timing and tax. A loan spreads the outlay over years, so its money is worth less in today's terms; a lease defers cash but forfeits the resale value and depreciation tax shield; buying ties up cash now but recovers a residual at the end. Discounting every cash flow to today and netting the tax effects is the only fair comparison.

Only the owner — the cash buyer or the borrower — can depreciate the machine and deduct that depreciation from taxable income. Each year's depreciation × your tax rate is cash you keep, an inflow that reduces the net cost. A lessee cannot depreciate a machine they don't own; instead they deduct the full lease rental. This is often the single biggest reason ownership beats leasing for a profitable, tax-paying farm.

It is the discount rate at which the two cheapest routes swap places. Below it one route is cheapest; above it another takes over, because a higher discount rate makes deferred cash (lease/loan) relatively cheaper than paying up front (buy). The tool scans rates from 0% to 40% and reports the crossover so you know how sensitive the decision is to your cost of capital.

The residual is the resale or trade-in value of the machine at the end of your use horizon, entered as a percentage of the new price. Only owners recover it, so a high residual strongly favours buying or financing over leasing. A combine kept six years might retain ~40% of its value; a quickly-obsolete implement far less. Lower the residual and leasing becomes more competitive.

Yes, in present-value terms it usually does, because the down payment replaces borrowed money that would otherwise accrue interest. The financed principal and the total interest both fall. The trade-off is cash flow: a bigger down payment ties up cash now, which is only worth it if that cash would otherwise earn less than the loan rate. The tool lets you vary the down payment and see the effect live.

For a true operating lease, yes — the rental is generally a fully deductible operating expense, so the after-tax cost is the rental × (1 − your tax rate). That deductibility partly offsets the lessee's loss of the depreciation shield. The tool applies the deduction to lease rentals and the interest deduction to loan interest, so each route is compared on an after-tax basis.

Use your farm's cost of capital — the return you could earn on the cash elsewhere, or the rate on your next-best borrowing. Many farms use 6–10%. A higher discount rate makes future payments cheaper in today's money, favouring routes that defer cash (lease, loan); a lower rate favours paying up front. If unsure, test a range with the slider and watch whether the winner changes.

Yes — when your discount rate is high (cash is valuable elsewhere), the machine depreciates fast or has a low residual, or your tax rate is low so the ownership depreciation shield is worth little. In those cases deferring cash through low lease rentals beats locking up capital in a depreciating asset. When the residual is high and you are a tax-paying owner, buying or financing usually wins.

No. Buy-vs-custom-hire asks whether to own a machine at all versus paying someone to do the operation. This tool assumes you have decided you need the machine on the farm and compares the three ways to acquire it — lease, loan or cash. Use the buy-vs-hire tool first to decide on ownership, then this one to decide how to pay for it.

The presets are representative planning figures — typical new prices, ag-equipment loan rates and terms, lease rentals (about 12–20% of new price per year) and residuals — of the magnitude reported by extension machinery-economics budgets and equipment dealers. They are starting points; replace every figure with your own dealer quote, lender rate and resale estimate for a farm-specific answer.

It is in the normal range. Well-maintained combines and large tractors commonly retain roughly 40–50% of their new value after six to seven years, while fast-obsolete or hard-used implements retain far less. A higher residual tilts the decision toward owning (buy or loan), because only the owner captures that resale value. Enter your own expected trade-in to refine the answer.