Problem:
In a lease vs. buy decision, what is the correct discount rate to use for NAL?
For example, if a company is trying to decide whether to buy or lease a piece of machinery. The company's WACC is 10% and it could take out a loan for the machinery at 9%. There is also one more option: the company is selling an old building that it doesn't plan to replace for two years. It had planned to put the proceeds from the sale into securities at 8% for the two years and then use that for the new building.
However, instead of securites, it could put that money into the machinery purchace. The machinery life is 5 years and the company's tax rate is 35%. For the NAL decision, do we use the after-tax cost of debt as the discount rate or do we use the opportunity cost of the securites and why? I don't need any calculations but just need to know what rate to use and why.