What discount rate is used in a lessor’s NPV analysis?

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What discount rate is used in a lessor’s NPV analysis?

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What discount rate is used in a lessor’s NPV analysis?

Explanation & AnswerSolution by a verified expert

Explanation

A lessor uses after-tax expenses while calculating the net present value of its cash flows. The expenses incurred by the lessor regarding the asset such as maintenance cost, depreciation expense and tax on asset are all recorded after availing the benefit of tax savings to calculate the net present value. So, the required expenses are discounted at an after tax cost of debt to calculate their accurate present values.

Verified Answer

In a lessor's NPV analysis, after tax cost of capital should be used as a discounting rate because while calculating NPV, a lessor uses after tax expenses to avail the benefit of tax savings so, the after tax expenses must be discounted at an after-tax cost of debt to estimate the accurate present values of cash flows.

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