L-16 Financial Evaluation 0f EL

L-16 Financial Evaluation 0f EL - CA(IBFS) L-16: Financial...

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CA(IBFS) L-16: Financial Evaluation of Equipment Leasing These deals with:- 1. Financial Evaluation of Lessee 2. Financial Evaluation of Lessor A Finance Lease can be evaluated either as an investment alternative or as a financing alternative depending upon the information available about the desirability of a capital investment. Given the need for investment in a project that an investment decision has already been made, leasing should be evaluated as a financing alternative to borrow and buy. The decision criterion is NPV of Leasing [NPV(L)] or net Advantage Leasing (NAL). The appropriate discount rate is the marginal cost of capital for all cash flows other than lease payments. The lease payments should be discounted using the pre-tax cost of debt. In operational terms, NAL to a Lessee : NPV(L)/ (NAL) = Investment Cost - PV of lease payments discounted by pre-tax cost of debt (Kd) - Management fees - PV of tax shield on depreciation discounted by Marginal Cost of Capital (Kc) - PV (Interest tax shield discounted by Kc
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L-16 Financial Evaluation 0f EL - CA(IBFS) L-16: Financial...

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