In valuing the lease versus purchase option, the relevant cash flows are the:
A)tax shield from depreciation.
B)investment outlay for the equipment.
C)a decrease in the firm's operating costs that are not affected by leasing.
D)All of the above are relevant.
E)None of the above are relevant.

Question

Quizplus · Accepted Answer

All three cash flows are relevant in valuing the lease versus purchase option. The tax shield from depreciation reduces the firm's taxable income, while the investment outlay for the equipment represents an upfront cost of ownership. Additionally, a decrease in the firm's operating costs that are not affected by leasing would increase the net benefits of ownership. Therefore, all three cash flows should be taken into consideration when making the decision between leasing and purchasing.

In Valuing the Lease Versus Purchase Option, the Relevant Cash