When calculating net present value earlier in the text, the appropriate cost of capital for a project was determined by the use of the funds, not the source. However, in leasing, we calculate the net advantage to leasing by discounting the cash flows at the lessee's after-tax borrowing rate. Aren't we violating our basic NPV principles here? Explain.

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Mahmoud Aljohani · Accepted Answer

Final Answer : We use the after-tax borrowing rate because we are deciding which is better, leasing or buying and the risk of these financing cash flows is properly reflected in the firm's cost of debt. Essentially, we have assumed the decision to acquire the asset has already been made via other analysis.

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