Homework Answers
Discount rate used for valuing alternative is aftertax borrowing rate.
Borrowing rate = 5%
tax rate = 25%
Aftertax interest rate = Before tax borrowing rate *(1-tax rate)
5%*(1-25%)
=3.75%
Cost of interest payment shall be 3.75% for borrowing $290000
Discount rate used shall also be 3.75%
So present value of $290000 paid with interest after tax discounted at 3.75% shall be same as $290000
So Company should consider $290000 as cost of borrowing while evaluating the leasing alternative,
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