Firms that are contemplating the acquisition of new

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Unformatted text preview: ld calculate the NPV of the incremental cash flows. Firms that are contemplating the acquisition of new fixed assets commonly confront the lease-versus-purchase (or lease-versus-buy) decision. The alternatives available are (1) lease the assets, (2) borrow funds to purchase the assets, or (3) purchase the assets using available liquid resources. Alternatives 2 and 3, although they differ, are analyzed in a similar fashion; even if the firm has the liquid resources with which to purchase the assets, the use of these funds is viewed as equivalent to borrowing. Therefore, we need to compare only the leasing and purchasing alternatives. The lease-versus-purchase decision involves application of the capital budgeting methods presented in Chapters 8 through 10. First, we determine the relevant cash flows and then apply present value techniques. The following steps are involved in the analysis: Step 1 Find the after-tax cash outflows for each year under the lease alternative. This step generally involves a fairly s...
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This document was uploaded on 01/19/2014.

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