If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan, which one of the following reasons would best explain that dichotomy?
A)the lessor charges a higher interest rate on the lease than normally.
B)the asset is unreliable, so requires a higher discount rate.
C)the lessee may be unsure that he can earn enough taxable income to use the tax shields in the lease analysis.
D)the discount rate is uncertain, so a higher one is used.

Question

Quizplus · Accepted Answer

The higher discount rate used in the financial lease analysis could be a result of the uncertainty surrounding the lessee's ability to earn enough taxable income to fully utilize the tax shields provided by the lease. This uncertainty could make the lessor less willing to extend credit, resulting in a higher discount rate.

If a Financial Lease Analysis Uses a Higher Discount Rate