The Accounting Review Vol. 49 No. 4 1974
Financial Lease Evaluation Under Conditions of Uncertainty: A Comment.
Abstract
This article presents comments on Harold Wyman's article "Financial Lease Evaluation Under Conditions of Uncertainty," published in the July 1973 issue of the journal "The Accounting Review." When operating costs and eventual scrap value under the buy/borrow alternative are random variables, with known distributions, Wyman shows how computer simulation can be used to provide both the expected value of the interest costs under each of the two alternatives and the statistical distribution of those costs. Wyman suggests two possible ways to evaluate leases: (1) Calculate the after-tax interest cost equivalent of the lease contract and the internal rate of return or IRR; (2) Calculate the after-tax net present value (NPV) of both the leasing and buy/borrow alternatives and accept the alternative with the higher net present value, provided that the NPV is positive. Even when the two modes of analysis lead to the same decision, the NPV method is easier to compute, and hence cheaper to implement than the IRR method. Under the lease alternative, separating the operating elements from the financing elements requires treating the lease as a form of debt financing. Although this treatment is not yet acceptable for financial accounting purposes, valid economic analysis and decision-making require it.
- DOI
- 10.2308/tar-4491966
- Volume
- 49
- Issue
- 4
- Pages
- 796-801
- Language
- en
- Sources
- openalex crossref