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Dear Sir,
The question is relating to barrow or lease.
As per the question; borrow and buy a bank loan with an after-tax cost of borrowing 4%, and the lease after-tax weighted average cost of capital is 8%.
In the answer, DF 4% has been used for both methods.
I thought it would be 8%. How do we decide/know which DF% to use?
many thanks,
The 8% would be relevant if we were appraising a project, but that is not what we are doing here – we are simply deciding if leasing costs more or less that borrowing, and therefore we discount at the after-tax cost of borrowing.
Have you watched my lectures on lease and buy? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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