Net advantage to leasing (NAL) helps you determine whether to buy or lease a certain asset. To find the NAL figure, you need to first calculate the net present value of purchasing the asset and the net present value of leasing it. You can then compare the two and find out whether you will save money by leasing. The calculations consider the cash flows of the two scenarios over a certain period of time.
Write down the various financial data that pertains to purchasing the asset. This includes cost of the asset, depreciation, the length of time you intend to use it, repayments for the financing, your tax rate, maintenance cost and estimated value at the end of its useful life. Depending on how detailed you want the NAL figure to be, you may choose to include or exclude some items on the list.
Draw a table to determine the cost of buying the asset. Write the years of usage across the top of the table. For example, if you plan to use it for five years, write the numbers 0 to 5 from left to right. Write the various cash flow items from Step 1 down the left side of the table.
Fill the table with the figures that correspond to the table headings. For example, if you pay for the asset in full at purchase and it costs $10,000, you will write -10,000 under year 0. If you finance the purchase and pay $600 every year starting one year from purchase, you will write -600 under every year starting from year 1 until you fully repay the loan. Add a minus sign (-) before every cash outflow item and simply write the numerical figure for every cash inflow item.
Draw a horizontal line below the last cash flow item, from the left edge to the right edge of the table. Add up all the cash flow items by year, so you get the total cash flow for every single year in the table.
Calculate the net present value of all the cash flows. In finance, people consider the same amount of money to be worth more today than in the future because you can invest the money today to get more in the future. Calculating the present value brings the future cash flows to their value today.
Write down the data you want to include in your lease cost calculations, including the term of the lease and the amount of each lease payment.
Draw a table for the lease cost. As you did with the purchase cost table, write down the years across the top of the table and the cash flow items down the left side of the table.
Fill the table with the cash flow items, adding a minus sign (-) before every cash outflow item.
Draw a horizontal line below the last cash flow item and add up the total cash flow of each year.
Calculate the net present value of the cash flows for the whole period of the lease.
Write down the figure for leasing. This is usually a cash outflow, so it has a minus sign (-).
Write the cost of purchasing under the cost of leasing. This is usually also a negative figure.
Subtract the purchasing cost from the leasing cost. This figure is your NAL.