Before Tax Cash Flow Projection

Lease/Buy Analysis

Back to Lease/Buy Index - planEASe Home Page


Effective Income represents the lease savings the owner does not pay by purchasing the building.

Cash Flow Before Tax represents the down payment, actual savings after debt , and the proceeds from sale the owner receives by purchasing the building.

This creates a "T-bar", and allows an IRR calculation on the down payment. In this case the owner will receive savings worth 19.7% IRR Before Tax on a $232,000 down payment.

If the owner cannot make 19.7% IRR Before Tax in another investment, then purchasing the property will give the greatest return on investment. Hence all things being equal, the purchase of the property would be the logical choice.

If the owner can make more than 19.7% IRR Before Tax in another investment, then purchasing the property would not give the greatest return on investment. Hence all things being equal, leasing the property would be the logical choice.

If the owner makes 19.7% IRR Before Tax in another investment, then 19.7% IRR Before Tax is the point of indifference, when buying or lease yields the same investment opportunities. Hence all things being equal, the leasing or purchase of the property would both be equally logical.



Time
Investment
and Sale
Effective
Income
Operating
Expense
Cash Flow
Before Debt
Debt
Service
Cash Flow
Before Tax
Buy (1,020,000) 0 0 (1,020,000) 788,000 (232,000)
2001 0 93,000 0 93,000 (87,815) 5,185
2002 0 97,650 0 97,650 (87,815) 9,835
2003 0 102,533 0 102,533 (87,815) 14,717
2004 0 107,659 0 107,659 (87,815) 19,844
2005 0 113,042 0 113,042 (87,815) 25,227
2006 0 118,694 0 118,694 (87,815) 30,879
2007 0 124,629 0 124,629 (87,815) 36,814
2008 0 130,860 0 130,860 (87,815) 43,045
2009 0 137,403 0 137,403 (87,815) 49,588
2010 0 144,274 0 144,274 (87,815) 56,458
Sell 1,531,161 0 0 1,531,161 (732,978) 798,184
Total 511,161 1,169,744 0 1,680,905 (823,128) 857,777


Rate of Return Before Debt (IRR) 14.3%
Rate of Return Before Tax (IRR) 19.7%
Net Present Value Before Debt @12% 141,615
Net Present Value Before Tax @12% 168,514

     



Taxable Income Projection

Lease/Buy Analysis



Time
Taxable
Revenue
Taxable
Expense
Interest
Expense
Depre-
ciation
Ordinary
Income
Buy 0 0 0 0 0
2001 93,000 0 (84,211) (18,429) (9,640)
2002 97,650 0 (83,770) (19,231) (5,350)
2003 102,533 0 (83,280) (19,231) 22
2004 107,659 0 (82,736) (19,231) 5,692
2005 113,042 0 (82,132) (19,231) 11,679
2006 118,694 0 (81,462) (19,231) 18,002
2007 124,629 0 (80,717) (19,231) 24,681
2008 130,860 0 (79,891) (19,231) 31,738
2009 137,403 0 (78,974) (19,231) 39,199
2010 144,274 0 (77,955) (18,429) 47,889
Sell 0 0 (8,000) 0 (8,000)
Total 1,169,744 0 (823,128) (190,705) 155,911






     



After Tax Cash Flow Projection

Lease/Buy Analysis


The after tax point of indifference is 15.9% IRR After Tax.

If you make 10% IRR after tax on other investments, all things being equal what would be the logical choice here? Leasing or Purchasing?

Answer: Purchasing, because the other investment returns 10% after tax on the $232,000 investment, and the purchase returns 15.9% in after tax savings.



Time
Cash Flow
Before Tax
Ordinary
Income
Capital
Gains
Taxable
Income

Taxes
Cash Flow
After Tax
Buy (232,000) 0 0 0 0 (232,000)
2001 5,185 (9,640) 0 (9,640) 3,278 8,463
2002 9,835 (5,350) 0 (5,350) 1,819 11,654
2003 14,717 22 0 22 (7) 14,710
2004 19,844 5,692 0 5,692 (1,935) 17,909
2005 25,227 11,679 0 11,679 (3,971) 21,256
2006 30,879 18,002 0 18,002 (6,121) 24,759
2007 36,814 24,681 0 24,681 (8,391) 28,422
2008 43,045 31,738 0 31,738 (10,791) 32,254
2009 49,588 39,199 0 39,199 (13,328) 36,261
2010 56,458 47,889 0 47,889 (16,282) 40,176
Sell 798,184 (8,000) 701,866 693,866 (235,915) 562,269
Total 857,777 155,911 701,866 857,777 (291,644) 566,133


Rate of Return Before Tax (IRR) 19.7%
Rate of Return After Tax (IRR) 15.9%
Net Present Value Before Tax @12% 168,514
Net Present Value After Tax @12% 70,950

     

Back to Lease/Buy Index - planEASe Home Page