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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
Assuming calculation is free from arthimetical errors what would conclusion for this decision be
Lease is better than buy
Buy is better than Lease
Further calculation is needed
Discount rate was wrong so a conclusion cannot be drawn
Correct ans is ” Lease is better than buy”, but can you please explain me?
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.