FM Topic Explainer: Lease Vs Buy

[@vaishnavisurnam5719]

That was straight to the point and the explanation was crystal clear to grasp. Thank you Mr Rashaad!!

[@anime_kdrama_editz9630]

The topic was very easy to understand. Thanks to you!

[@SteveWillisACCA]

Very helpful!

[@DirterXaap]

Lovely ❤

[@mohammedwilliams3277]

Great video!!....I would like to confirm that the reason we did not find the Equivalent Annual Cost (EAC) of both options was because they both had the same amount of years (4 years), so the decision would be the same if the NPV is used instead of EAC as the deciding factor?

[@OM-rm4ro]

Yes, if they would hv different life span then NPV can't comparable, need to rebase by using the EAC approach

[@monishanishatshama2393]

Assalamu Alaykum, the tax benefit for year 1 is taken 375,000, instead of 3.75 mil, in calculating the buy option. When calculated with 3.75 mil, it gives off a positive NPV of 2.19 mil. Can someone please clarify this? It was again fixed to be 3.75 mil as the opening balance Y2.

[@sharmajidaladka]

Hello Sir, It is mentioned in the question that the company intendes to finance the new machine by means of a 4 year fixed interest loan. Shouldn't we take this into account when calculating the NPV for the Buying option? Also, should we consider the Tax savings on Interest expenditure on loan?

[@MinhNguyen-qz2sn]

Investment appraisal does not take interest payments into account, regardless the project is financed by equity or debt. This is one of the basic principles.

[@rhs_finscript]

There are several methods for resolving the Lease vs Buy decision, each varying according to the approach used in different courses. In the ACCA Financial Management approach, discounting the cash flows at the loan's interest rate integrates the interest's effect into the net present value (NPV).

[@mohammedwilliams3277]

The effect of interest is already accounted for in the discount rate (i.e Cost of debt.)

[@renatasantos7369]

Great explanation. Thanks