Page 46 - PowerPoint Presentation
P. 46
CAPITAL INVESTMENT APPRAISAL
CAPITAL INVESTMENT APPRAISAL
Operating Lease
• If a project has a positive NPV it is always better to purchase the asset
and obtain the tax benefits.
• An operating lease will always be more expensive when compared to
purchasing the asset outright.
• However, if the project has a high risk of failure the advantage of an
operating lease is that the company can terminate the lease if the
project fails thereby limiting their losses.
• An operating lease is not a form of finance – it is an alternative method
of investing in an asset.
• Therefore in your calculation you will compare the operating lease to an
outright purchase using the WACC as a discount rate.
46
