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Dear Sir, in December 2009 exam, they ask to calculate net present value by using financing cash flow for purchase or lease and later they ask to calculate net present value by using nominal terms for only purchase, I don’t understand their differences, apparently former one was using four-year loan interest rate by excluded operating costs saving and later one was using WACC by included operating costs saving, may I use this rule to take part in exam?
many thanksThe operating costs were excluded (when deciding whether to lease or buy) simply because they would occur whether they leased or bought the machine.
You could certainly have included them, but you would include them in both and still come to the same decision.
To choose between leasing and buying, we always discount at the cost of borrowing.
To decide whether or not to actually invest in the project we always discount at the WACC.
The free lectures on lease and buy will help you 🙂
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