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Chapter 6
3.3 The lease v buy decision
To evaluate whether an asset should be leased (usually under a finance
lease), or whether money should be borrowed to buy the asset,
compare the NPVs of:
1 The cash flows related to leasing (e.g. lease payments and
associated tax relief on the interest).
2 The cash flows related to the purchase (e.g. capital cost, residual
value, tax depreciation allowances tax relief, maintenance costs).
Discount BOTH options at the POST TAX cost of debt – to reflect
the fact that both options are considered to have similar risk (the risk
associated with borrowing).
The cheaper alternative (lower negative NPV) is chosen.
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