Lease vs buy: clarifying the impact of tax and borrowing rates

Abstract

Purpose The purpose of this paper is to survey the lease vs buy coverage in leading managerial finance textbooks and to clarify the impact of tax rates and borrowing rates. Design/methodology/approach The survey uses “plain vanilla” lease vs buy scenarios to critique and clarify particular issues in the textbook presentations. Findings The survey finds: a lone text shows that there can be a gain from leasing if the lessee’s tax rate is higher than the lessor’s, which challenges the “conventional wisdom” maintained in all the other texts; some textbook examples attribute an overall benefit to leasing to the tax rate difference, but the benefit is actually due to a borrowing rate difference, and borrowing rate differences may be a more important source of leasing benefits than tax rate differences. Originality/value The survey provides insights that are not well known and should be useful to instructors and practitioners.