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Respected sir,
I know the concept behind the after-tax borrowing rate but the confusion is why do we use it for leasing? leasing doesn’t involve any interest payments. however, buying does and using after-tax borrowing makes sense. I have watched your lectures on investment appraisal but I wasn’t able to understand this part.
In future, you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
It is only in lease v buy questions that we discount at the cost of borrowing, purely to decide whether it is cheaper to buy or to lease (not to decide whether or not to get the machine).
Leasing and buying are effectively the same in that we still have the machine and we either make repayments on the borrowing or we make payments for leasing – the objective is simply to decide which is the cheaper of the two.I am sorry I thought I am posting on the TUTOR forum.
Thank you, it’s clear now.
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