78106_18_Web_Ch18B_p01-02

# 78106_18_Web_Ch18B_p - WEB EXTENSION Percentage Cost Analysis 18B nderson's lease-versus-purchase decision from Chapter 18 can also be analyzed

This preview shows pages 1–2. Sign up to view the full content.

WEB EXTENSION 18B Percentage Cost Analysis A nderson s lease-versus-purchase decision from Chapter 18 can also be analyzed using the percentage cost approach. Here we know the after-tax cost of debt, 6.5%, so we can find the after-tax cost rate implied in the lease contract and com- pare it with the cost of the loan. Signing a lease contract is similar to signing a loan contract in either case, the firm has the use of equipment and must make a series of payments. We know the rate built into the loan: 6.5% after taxes for Anderson. There is an equivalent cost rate built into the lease. If the equivalent after-tax cost rate in the lease is less than the after-tax interest rate on the debt, then there is an advantage to leasing. Table 18B-1 sets forth the cash flows needed to determine the equivalent loan cost. Here is an explanation of the table: 1. The net cost to purchase the equipment, which is avoided if Anderson leases, is shown on Line 1 as a positive cash flow (an inflow) at Year 0. If Anderson

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 05/03/2010 for the course FRR 3032 taught by Professor Mr.wroshr during the Spring '10 term at Crafton Hills College.

### Page1 / 2

78106_18_Web_Ch18B_p - WEB EXTENSION Percentage Cost Analysis 18B nderson's lease-versus-purchase decision from Chapter 18 can also be analyzed

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online