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 lessee may be unsure about earning enough taxable income to utilize the tax shields, leading to a higher discount rate to account for this uncertainty in the lease analysis.

If a Financial Lease Analysis Uses a Higher Discount Rate