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

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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
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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.

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

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