When Deciding Whether or Not to Lease an Asset, the _____________

question 88

Multiple Choice

When deciding whether or not to lease an asset, the _____________ should be compared against the ______________, and if the first is lower then the company should proceed with the lease.

• A)Internal rate of return/cost of debt
• B)WACC/cost of debt
• C)Cost of debt/internal rate of return
• D)Return on equity/WACC

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Definitions:

Mutually Exclusive Projects

Projects where acceptance of one automatically excludes the acceptance of the other due to competing resources.

IRR

Internal Rate of Return; a metric used in capital budgeting to estimate the profitability of potential investments, representing the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

NPV

Net Present Value, a method used in capital budgeting to assess the profitability of an investment or project by calculating the present value of expected future cash flows minus initial costs.

Replacement Chain Approach

The Replacement Chain Approach is a method used in capital budgeting to compare projects of unequal lifespans by replicating them until they reach a common end point, facilitating fair comparison.