Lessee Perspective

Finance lease effectively transfers the risk and rewards with the ownership of an equipment from the lessor to the lessee. A lease can be evaluated either as an investment decision or as a financing alternative. Given that the investment decision has already been made, a firm (lessee) has to evaluate whether it will purchase the asset equipment or acquire it on lease basis. Since least rental payments are similar to payments of interest on debt, leasing in essence is an alternative to borrowing. This lease evaluation from the lessee point of view, thus, essentially involves a choice between debt financing versus lease financing. It is in this context that an evaluation of lease financing from the viewpoint of the lessee is presented here. The decision criterion used is the asset Present Value of Leasing Advantage of Leasing (NAL). The discount rate used is the marginal cost of capital for the cash flows other than lease payments and the pre tax cost of debt for lease payments. The value of the interest tax shield is included as a foregone cash now in the computation of NPV (L) NAL .

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