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Discount factor

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Discount factor

  • This topic has 1 reply, 2 voices, and was last updated 2 years ago by John Moffat.
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    Posts
  • November 6, 2022 at 6:47 pm #670789
    azash
    Participant
    • Topics: 2
    • Replies: 3
    • ☆

    HI Sir

    in a Lease or buy question ;

    Option 1. The vehicle could be bought using a bank loan with an after tax cost of borrowing of 4% pa

    Option 2. It could be leased for a period of 4 years. xxx
    The company’s after tax weighted average cost of capital is 8%.

    in this case what discount factor should be used? 4% or 8%. and why ?

    November 7, 2022 at 9:13 am #670826
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    If deciding which is best (i.e. leasing or buying) then we should discount at 4%.

    I explain the reasons for this in my free lectures on lease v buy.

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