Question
A company is in need of a new plant to ramp up
production at its manufacturing unit. It is contemplating ways to finance the new plant and is deciding between debt or lease financing. How can it analyze the two options to decide which one would be preferable?Solution
Since both options are tax-deductible, the after-tax cost of borrowing is used to discount the cash flows under each alternative to find the NPV. The option with a higher NPV can be chosen by the company to finance its new plant.
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