Carpinelli Foods Limited is considering a leasing arrangement to acquire new processingequipment. Carpinelli's before-tax short-term borrowing rate is 5%, its before-tax long-termborrowing rate is 8%, its tax rate is 30% and the lessor's implied discount rate is 6%. What is the rateCarpinelli should use in its analysis of the lease-or-purchase issue?

Question

Quizplus · Accepted Answer

The rate Carpinelli should use is the after-tax cost of debt, which can be calculated as follows:
Short-term borrowing rate*(1-tax rate) + Long-term borrowing rate*(1-tax rate) / 2 = (5%*(1-30%) + 8%*(1-30%)) / 2 = 5.6%
Therefore, choice C is the correct answer.

Carpinelli Foods Limited Is Considering a Leasing Arrangement to Acquire