The Accounting Review Vol. 49 No. 4 1974
Implicit Factors in the Evaluation of Lease vs Buy Alternatives: A Comment.
Abstract
This article comments on the article "Implicit Factors in the Evaluation of Lease vs. Buy Alternatives," by Lanny G. Chasteen, published in the October 1973 issue of the journal "The Accounting Review." The implications of Chasteen's corollaries are valid and sound if the lease payment period is equal to the U.S. Internal Revenue Service (IRS)'s depreciation guideline life. If, however, the depreciation life for tax purposes differs from the lease period, it is possible to favor leasing over buying even though the implicit interest rate of the lease is greater than the rate at which the firm can borrow. For example, one should assume a potential lessee could lease an asset for $1000 a year for three years and purchase the asset for a nominal amount at the end of the lease period. It is assumed that the lease's implicit interest rate is 8%. An 8% implicit interest rate would mean that the potential lessee could directly purchase the asset for $2577. It is further assumed that the potential lessee can borrow at 6%, uses accelerated depreciation, and the IRS guidelines call for an 8-year depreciable life for this firm.
- DOI
- 10.2308/tar-4491999
- Volume
- 49
- Issue
- 4
- Pages
- 807-808
- Language
- en
- Sources
- openalex crossref