Valcourt Industries is considering a leasing arrangement to acquire new processing equipment.Valcourt's cost of capital is 10%, its before-tax long-term borrowing rate is 8%, its tax rate is 30%and the lessor's implied discount rate is 5%. What is the rate Valcourt should use to discount the salvage value of its existing equipment in a lease-or-purchase analysis?
A) 8%
B) 10%
C) 5.6%
D) 5%

Question

Quizplus · Accepted Answer

Valcourt should use its cost of capital (10%) to discount the salvage value in a lease-or-purchase analysis, as it reflects the opportunity cost of capital for the company.

Valcourt Industries Is Considering a Leasing Arrangement to Acquire New