The relevant discount rate to use in a lease-purchase analysis is the:
A) Pre-tax borrowing rate.
B) After-tax borrowing rate.
C) Firm's weighted average cost of capital.
D) Current risk-free rate of return.
E) Firm's pre-tax weighted average cost of capital

Question

Quizplus · Accepted Answer

The after-tax borrowing rate is the relevant discount rate in a lease-purchase analysis because it reflects the actual cost to the company of borrowing funds, after accounting for the tax shield provided by interest deductions. This rate provides a more accurate comparison between leasing and purchasing options, as it considers the tax implications which are a significant factor in such financial decisions.

The Relevant Discount Rate to Use in a Lease-Purchase Analysis