If the lease requires an initial payment of $1,200 and the finance agreement requires an initial payment of $2,000, the $800 difference could be invested to generate earnings or used to pay off other bills and thereby save interest payments. These earnings or savings will generate investment earnings or interest savings that should be applied to the cost of the lease. Generally, it is better to do this calculation after deducting any income taxes that would be due on the earnings.

If the $800 difference is deposited in an account that earns 5% and the earnings are taxable at your tax rate of 30%, the effective monthly after-tax interest rate is 5% ÷ 12 × (1–30%) = 0.2917%. The benefit for each month in the lease term is $800 × .2917% = $2.33 per month. If the $800 difference is instead used to pay a nondeductible credit card debt on which the APR is 16%, the benefit received each month in the lease term is $800 × 16% ÷ 12 = $10.67 per month.

If you don’t invest the funds or pay down an existing debt, you will not receive these economic benefits. Also, conditions attached to the investment or changes in your situation may make your rate or yield assumption invalid. Your assumptions project the benefits over the full term of the lease and finance arrangements you are considering, and unforeseen circumstances could arise that would change your rate or yield projections.