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The new technology is expected to reduce operating costs by $5·80 per unit in current price terms. This reduction in
operating costs is before taking account of expected inflation of 5% per year
Tutor why the reduction in operating cost of 5.8 dollar does not increase the cash flow, in this case reduce from licence before applying 30% tax benefice.
why the loan interest is used here instead of the WACC of 11% as a cost of capital.?thx
The saving in operating cost is taken into account in part (b).
It has been ignored in part (a) simply because they make the saving whether they lease or buy. The operating costs will be the same and so in part (a) we only look at the difference in the two financing flows.Again, in part (a) because we are simply comparing leasing with buying, we discount at the cost of the loan finance. This is all explained in the free lectures on lease and buy.
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