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What is the correct discount rate to use for NAL?

In a lease vs. buy decision, what is the correct discount rate to use for NAL?

For example, if a company is trying to decide whether to buy or lease a piece of machinery. The company's WACC is 10% and it could take out a loan for the machinery at 9%. There is also one more option: the company is selling an old building that it doesn't plan to replace for two years. It had planned to put the proceeds from the sale into securities at 8% for the two years and then use that for the new building.

However, instead of securites, it could put that money into the machinery purchace. The machinery life is 5 years and the company's tax rate is 35%. For the NAL decision, do we use the after-tax cost of debt as the discount rate or do we use the opportunity cost of the securites and why? I don't need any calculations but just need to know what rate to use and why.

Solution Preview

We have to use WACC. WACC is the weighted average cost of capital and this cost is calculated by averaging all the costs. This would include the after ...

Solution Summary

The solution explains which calculations to use and why.

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