# Explain how the cash flows are structured in order to estimate the net advantage to leasing.

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Explain how the cash flows are structured in order to estimate the net advantage to leasing. |

Verified Answer

The net advantage to leasing structures the cash flows as it promotes leasing the asset over purchasing it by comparing the net cash flows from both the options. The present value of after-tax leasing cash flows are deducted from the present value of after-tax owning cash flows to estimate the net advantage of leasing (NAL).

After-tax leasing cash flows are the after-tax costs incurred in leasing an equipment and after-tax owning cash flows are the after-tax costs incurred while owning an equipment. The rate used for discounting the cash flows is the after-tax cost of debt.