A way to analyze whether debt or lease financing would be preferable is to:
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A. B. C. D.B
When deciding between debt and lease financing, there are several factors that need to be considered, including the cost of financing, tax implications, and cash flow considerations. One way to compare the two financing options is to analyze their net present values (NPV) and determine which option provides a higher value to the organization.
The net present value is a calculation that compares the present value of cash inflows to the present value of cash outflows, discounted at a specific rate. The discount rate used should reflect the cost of capital for the organization. The option with the higher NPV is generally the preferred financing option.
Therefore, answer A is the correct option: "Compare the net present values under each alternative, using the cost of capital as the discount rate."
Answer B, "Compare the net present values under each alternative, using the after-tax cost of borrowing as the discount rate," is not the best approach, as it does not take into account the cost of equity, which is also a significant factor in the cost of capital.
Answer C, "Compare the payback periods for each alternative," is not the best approach either since it only considers the length of time it takes to recoup the initial investment, without taking into account the time value of money.
Answer D, "Compare the effective interest costs involved for each alternative," is also not the best approach since it only considers the interest rate, without taking into account the full cost of financing, including taxes and fees.