What is the appropriate discount rate to use in a leasing decision? (ie wacc, cost of capital/debt?

Options for Discount rate

1. Discount rate should be firm's weighted average cost of capital. Lease-vs-purchase decision is a capital budgeting decision, so it should be evaluated at the company's cost of capital. WACC is the appropriate opportunity rate to use.

2. Cash flows generated in a lease vs purchase situation are more certain than those generated by a firm's average project. Because of this, the cash flows should be discounted at a lower rate because of their lower risk. A firm's cost of secured debt should be used.

If a company is deciding between leasing and buying with cash or financing and buying with debt, what discount rate should be used in order to find the present value of leasing, owning, or financing the purchase with debt.

It should be their weighted average cost of capital. They won't incur more secured debt because of the lease, will they? So it's their average cost of capital that should be used -- WACC -- because they'll incur that much less debt.

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