The WACC Is Not Used in the Lease Versus Purchase

question 30

Multiple Choice

The WACC is not used in the lease versus purchase decision because:

• A) the WACC was used in the decision to acquire the asset, this is only a financing decision.
• B) the WACC is used only when a lease alone is considered and not a lease versus purchase.
• C) the WACC does not include the lease cost of capital and therefore should not be used.
• D) tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.

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Definitions:

Raise Funds

The process of gathering financial resources from various sources to support a particular project, venture, or cause.

Optimistic

A disposition or belief that good things will happen and that investment risks are more likely to result in positive outcomes.

Risk-Return Trade-Off

The principle that potential return on investment increases with the amount of risk undertaken in the investment.

Expected Returns

A projection of the amount of profit or loss an investment is likely to generate, factoring in various probabilities.