Managers have to decide where to invest their money, such as in financing or investment projects or assets. In making these decisions, they consider what are the returns to be had later on as the project or asset is put into use. The opportunity costs are also take into consideration. Moral and ethical decisions also play a factor into the long run, since these factors often are telltale signs of sustainable returns.
Capital investment decisions involve factors such as historical cost, what discount factor to use, identification of incremental cash flows (after tax), net present value and other criteria if desireable. Economic and geopolitical factors are also considered, as is capital budgeting techniques to evaluate projects once implemented or in consideration of being initiated.
Managers need to be concerend with the risk free rate, that is the rate that can be had in the market that compensates lenders for investing. This is the anticipated rate of inflation. Second, what is the risk premium, the rate that is required over and above the risk free rate. This rate is demanded by investors as compensation depending on the specific types of risks. Third, default risk, the risk that borrowers may not be able to pay back their loans on time or at the right time. Liquidity risk, the risk that the lender may require the money for their own purposes but will have loaned it out, therefore, it is no longer available. Reinvestment rate risk, is the risk that the borrower may want to pay back the loan early, especially if interest rates are low, resulting in a loss to the lender, since that money can be reinvested but at very low rates.
Once a project is implemented, managers want to know how is the performance regarded. There are two ratios to do this, marginal return and total return.
Marginal Return
= Total cash flows alternative _{n}
= Total cash flows alternative _{n1}
= Capital invested alternative _{n}
= Capital invested alternative _{n1}
[CF1n  CF1n1 / CF0n  C0n1]  1
Total Return
CF_{1}= future cash flow to be received one year from today
C_{0}= cost of initial investment
[CF1  C0]  1
Equivalent loan approach 






Part 1: Calculate the initial investment outlay of the equipment 


Purchase cost 
$375.000,00 


Delivery and installation cost 
86.000,00 


Investment tax credit 
50.000,00 


Initial investment outlay 
$411.000,00 



Part 2: Calculate leasing costs 


Step 1: Calculate the present value of aftertax lease payments 


Annual aftertax lease payment 
9.450,00 


PV of the aftertax lease payments 
$72.895,06 



Step 2: Calculate the present value of incremental difference 


in aftertax operating costs between borrowing and leasing 


Annual aftertax operating costs from borrowing 
8.400,00 


PV of annual aftertax operating costs 
$60.955,41 



Step 3: Calculate the present value of the CCA tax shields 


PV of perpetual CCA tax shield 
90.985,73 


PV of lost tax shield on salvage value 
1.409,80 


PV of CCA tax shields 
$89.575,93 



Step 4: Calculate the present value of the salvage value 


PV of salvage value 
$6.179,62 



Part 3: Calculate the equivalent loan 


Equivalent loan 
$107.695,19 



Part 4: Calculate the net value to leasing 


NVL 




$303.304,81 