You are comparing a lease to a purchase. When computing the net advantage to leasing you should discount the cash flows using the:
A) pretax cost of borrowing.
B) pretax risk-free rate.
C) aftertax borrowing rate.
D) aftertax risk-free rate.
E) aftertax interest rate implied by the lease payments.

Question

Quizplus · Accepted Answer

The correct approach to comparing a lease to a purchase involves discounting the cash flows using the aftertax borrowing rate. This is because the aftertax borrowing rate reflects the actual cost of financing to the company, taking into account the tax shield benefits of interest payments.

You Are Comparing a Lease to a Purchase