1. Lease or Buy? 22.5
LO4
The company needs to determine whether it is better off borrowing the money and buying the asset or leasing
Compute the NPV of the incremental cash flows
Appropriate discount rate is the after-tax cost of debt since a lease is essentially the same risk as a company’s debt

2. Net Advantage to Leasing
LO4
The net advantage to leasing (NAL) is the same thing as the NPV of the incremental cash flows
NAL = Investment – PV(after-tax lease payments) – PVCCATS – PV(Salvage)
If NAL > 0, the firm should lease
If NAL < 0, the firm should buy

3. Example – continued
LO4
Consider the previous example. Assume the firm’s cost of debt is 11%.
After-tax cost of debt = 10(1 - .4) = 6.6%
NAL = -119
Should the firm buy or lease?