An After-Tax Equivalent Payment Approach to Conventional Lease Analysis

Lease evaluation by the common equivalent-loan method attempts to equalize financing supplied, but even the most analytically elegant applications ignore after-tax net cash-flow implications. As a result, the inherent arbitrariness of most "equivalent" loans leads to conceptually incorrect decision signals or present cost determinations. A loan whose equivalency is based on equalizing the after-tax cash flows resolves the conceptual differences and suggests that in an efficient capital market, the financial executive should be indifferent between leasing and borrowing.