Background: Understanding how taxes work is critical to "getting" the advantages/disadvantages of leasing versus buying cash flows. Illustration: If we are in the 20% "marginal tax bracket" it means we pay $20 of taxes on the next $100 of profit we earn-we get to keep $80. Conversely if we incur an expense of $10 at the margin, it reduces profit by $10 and we avold $2.00 in taxes. Thus the "after-tax" cost of the expense is $8.00-this equals $expense x (1-t) where t= the marginal tax rate. The lease payment is a deductible expense so if the lease payment is $20,000 and the marginal tax rate is 20%, the after tax cash flow is $20,000 X (1-0.20)= $16,000. If I buy an asset for cash, the deductible expense is the annual depreciation expense as it wears out. If I purchase it and use borrowed money to help pay for it, I can deduct the depreciation and the interest expense of the loan (cannot deduct principal payments though). The after-tax cash flow or cost of the depreciation and interest expenses is the same math. Ideally you see that the higher the tax rate thil lower the after-tax cost or cash flow. Our tax system is progressive so if you earn more and more money, you pay a higher rate of taxes than someone that doesn't. When you lease (you are the lessee), you have lease payments. The Lessor owns the asset and gets to take the depreciation expense deduction 4. Compare the "Net After-tax Cash Flows" of the costs of leasing (Table 13-2) versus buying the planter (Table 13-3). Note: On the tables, Year zero "O" is today, the day you make the lease or purchase deal. Why might a farmer prefer paying the expense cash flows associated with the lease? Why might a farmer prefer paying the expense cash flows associated with the purchase