OTQ 126, Bpp kit

Because the flows that were set up were the flows for leasing as compared with buying (outflows for the lease payments, saving of initial investment, etc..)

Since the NPV was positive it means the saving from not buying is greater than the amount paid for leasing – so it is better to lease.

A lease versus buy evaluation has been performed. The management accountant performed the calculation by taking the saved initial outlay and deducting tax adjusted lease payments and the lost capital allowances. The accountant discounted the net cashflows and post tax cost of borrowing. The resultant NPV was positive.

I know normally when deciding whether to lease or buy we set up the cash flows for each separately, discount at the post-tax cost of borrowing, and choose whichever of the two has the lower NPV.

The question says that instead of setting up two sets of cash flows, the accounting has just put them all in one instead of showing them separately. So if there were to lease, they would obviously have all the lease payments as normal, but they would not be buying and so would save the initial cost of buying and would lose the tax saving on capital allowances.

So the resulting NPV will be the difference between the PV of leasing and the PV of buying and depending on whether it is positive or negative will indicate which is the better option.