Which of the following discount rates should be used for the lease versus borrow decision with a true tax lease?
A)the risk-free rate of interest
B)the company's cost of borrowing
C)the company's after-tax cost of borrowing
D)the company's weighted average cost of capital
E)the company's cost of equity

Question

Quizplus · Accepted Answer

When making a lease versus borrow decision with a true tax lease, the after-tax cost of borrowing should be used as the discount rate. This is because a true tax lease provides tax benefits, such as depreciation, which reduces the after-tax cost of borrowing. Therefore, using the after-tax cost of borrowing as the discount rate takes these tax benefits into account and provides a more accurate comparison between leasing and borrowing.

Which of the Following Discount Rates Should Be Used for the Lease