Though this method is simple, it lacks certain intuitive appeal. We presented an alternative method in the hopes of increasing the reader’s intuition. Relative to a lease, a purchase generates debt capacity. This increase in debt capacity can be calculated by discounting the difference between the cash flows of the purchase and the cash flows of the lease by the aftertax interest rate.

The increase in debt capacity from a purchase is compared to the extra outflow at year 0 from a purchase. LO.1