This article presents response from the author to a criticism of his article "Implicit Factors in the Evaluation of Lease vs. Buy Alternatives," published in the October 1973 issue of the journal "The Accounting Review." The author's article concluded that, if the implicit interest rate in the lease payments equals the rate at which a firm can borrow and if the depreciation pattern under buy coincides with the quasi-depreciation pattern under leasing, a firm would be indifferent between buying and leasing. He also stated that an implicit interest rate in a lease which exceeds the rate at which a firm can borrow and an accelerated depreciation method under the buy alternative which results in a greater tax shield will favor buying over leasing. It was criticized that the conclusions do not hold if the depreciation life for tax purposes exceeds the lease payment period and that leasing may be preferable even though the implicit interest rate in the lease exceeds the borrowing rate. Since the cash flows resulting from the tax shield should be discounted at the cost-of-capital instead of the borrowing rate, it was assumed that the cost-of-capital equals the borrowing rate since a 6% discount rate was used.

The article presents the effect of implicit interest rates and the depreciation method used in evaluating lease versus buy decisions. Defining and measuring the cost of capital for use in the investment decision are regarded as separate problems. It is assumed to be given and does not enter the analysis. A basic assumption of this paper is that the lease is a financial lease and, therefore, is similar to long-term debt from an analysis standpoint. If the firm leases, the periodic lease payments are tax deductible, whereas if the firm buys, the acquisition cost is tax deductible through time in the form of depreciation. The approach presented in this paper highlights two factors that must be considered in every lease vs. buy decision. One is the implicit interest rate in the lease payments as compared to the firm's borrowing rate. If the implicit interest rate in the lease exceeds the rate at which the firm could borrow, borrowing and buying would be preferred. The second factor is the tax shield effects of the non-interest deduction in the lease payments as compared to permissible depreciation patterns under buying.

Reviews the book "Incremental Information Content of Statement 33 Disclosures," by William H. Beaver and Wayne R. Landsman.