ACCA FM · Chapter 8 · Question 7 of 10
In a lease versus buy decision, which discount rate should normally be used to discount the financing cash flows?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) The after-tax cost of borrowing
Explanation
Once the investment decision has been made, the lease versus buy decision is a financing decision comparing leasing with borrowing to buy. The relevant cash flows (purchase cost, tax savings on depreciation, lease payments and tax relief on them) are therefore discounted at the after-tax cost of borrowing.
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