NPV Analysis

Now that we know that the relevant rate for evaluating a lease versus buy decision is the firm's aftertax borrowing cost, an NPV analysis is straightforward. We simply discount the cash flows back to the present at Tasha's aftertax borrowing rate of 5 percent as follows:

The NPV from leasing instead of buying is -$87.68, verifying our earlier conclusion that leasing is a bad idea. Once again, notice the signs of the cash flows; the first is positive, the rest are negative. The NPV we have computed here is often called the net advantage to leasing (NAL). Surveys indicate that the NAL approach is the most popular means of lease analysis in the real world. Our nearby Work the Web box illustrates the use of lease-versus-buy analysis of automobiles.

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