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Unformatted text preview: Chapter 21 Leasing 21A-1 APV Approach to Leasing The box that appeared earlier in this chapter showed two methods for calculating the NPV of the lease relative to the purchase: 1. Discount all cash fl ows at the aftertax interest rate. 2. Compare the purchase price with the reduction in optimal debt level under the leasing alternative. Surprisingly (and perhaps unfortunately) there is still another method. We feel com- pelled to present this third method because it has important links with the adjusted present value (APV) approach discussed earlier in this text. We illustrate this approach using the Xomox example developed in Table 21.3. In a previous chapter, we learned that the APV of any project can be expressed as follows: APV 5 All-equity value 1 Additional effects of debt In other words, the adjusted present value of a project is the sum of the net present value of the project when fi nanced by all equity plus the additional effects from debt fi nancing. In the context of the lease-versus-buy decision, the APV method can be expressed like this: Adjusted present value of the lease relative to the purchase 5 Net present value of the lease relative to the...
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This note was uploaded on 01/17/2011 for the course ACTSC 372 taught by Professor Maryhardy during the Spring '09 term at Waterloo.
- Spring '09