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Compare the two financing options below by calculating their respective Net present values ( NPVs ) : Example Evaluation lease financing on relation to debt
Compare the two financing options below by calculating their respective Net present values NPVs:
Example
Evaluation lease financing on relation to debt financing
We assume that the firm has decided to invest mil. in a project and has decided to finance the project
with either debt or lease financing
Characteristic of the lease financing:
Leasing period: years
Lease payments: advanced payment mil. at time annual payments mil. at the end of each year.
Lease factor
Characteristic of the borrowing:
If the asset is purchased, company would finance it with a loan of mil, payable over years with annual
payments of at the end of each year. Interest rate of the loan The company is in a tax bracket.
Assets lifetime is year. Discount rate
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