Part v long term financing this tax shield must be

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Part V Long-Term Financing This tax shield must be subtracted from the NPV of the lease because it represents inter- est deductions not available under the lease alternative. The adjusted present value of the lease relative to the purchase is: $87.68 $592.03 $679.71 This value is the same as our calculations from the previous two approaches, implying that all three approaches are equivalent. The accompanying box presents the APV approach. Which approach is easiest to calculate? The first approach is easiest because we need only discount the cash flows at the aftertax interest rate. Though the second and third approaches (in the two boxes) look easy, the extra step of calculating the increased debt capacity is needed for both of them. Which approach is more intuitive? Our experience is that students generally find the third method the most intuitive. This is probably because they have already learned the APV method from a previous chapter. The second method is generally straightforward to those students who have taken the time to understand the increased debt level concept. The first method seems to have the least intuitive appeal because it is merely a mechanical approach.
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