Defining the discount rates to be used in the calculations is an
important question in the present value method. Different discount
rates have been used in discounting flows with different degrees of
riskiness attached to them in order to arrive at one single present
value. The methods of determining these discount rates are,
however, still controversial. For this reason, and for the sake of
expositional clarity, it was considered justified to use one discount
rate only in constructing the present model.
Comparing the results of this model with the previous studies is
difficult because of the scarcity of lease-vs.-buy comparison models
with inflation incorporated. This stands in marked contrast with the
wealth of studies that analyse inflation and its incorporation into the
present value method in general. As is evident from the present
paper, inflation can be taken into account in calculating the present
values for the alternatives in a relatively clear-cut manner.
The numerical analysis of the model was mainly restricted to one
investment decision, in which the structure of finance, tax rate, type
of loan and method of depreciation were allowed to take different
values. The diagrams or nomographs that were used in
summarising the results of the analysis can, however, be seen as
important even more generally. If the firm applies the present value
model constructed here in its lease-vs.-buy comparisons, it is
possible, after the parameters are fixed, to design the nomographs
specifically according to the requirements of each investment
problem.
(The Finnish Journal of Business Economics 3-1981, 239-277.)