The reason for after tax borrowing rate is the suitable discount rate to be used for the lease evaluation. Introduction: After tax rate : It is the interest rate multiplied with the debt amount. For example, if a company’s debt has annual interest rate of 10% and the combined state and federal income tax rate is 30%, the after tax rate value is 7%. The computation is as follows: [ 10 % Interest rate × ( 100 % − 30 % ? tax ? rate ) ] = [ 10 % × 70 % ] = 7 %

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Chapter 27, Problem 9CRCT

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To determine: The reason for after tax borrowing rate is the suitable discount rate to be used for the lease evaluation.

Introduction:

After tax rate: It is the interest rate multiplied with the debt amount. For example, if a company’s debt has annual interest rate of 10% and the combined state and federal income tax rate is 30%, the after tax rate value is 7%. The computation is as follows:

[10%Interest rate×(100%−30%?tax?rate)]=[10%×70%]=7%

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