Abstract
IN HIS RECENT ARTICLE Professor Gordon [1] improved the state of the art relative to the analysis of the lease buy decision. However, I suggest that his model would be improved if, in neutralizing the implicit debt financing in the lease alternative, the implicit loan were made more closely comparable to the lease, in terms of both the initial payment and the size of subsequent payments. In addition, a method for arriving at the debt payments equivalent to any set of lease payments is presented in the appendix. In order to highlight the differences in the treatments the debt neutralization was performed on the lease option using a technique similar to that suggested by Vancil [2]. This procedure has the added advantage of leaving the model of the buy option unaltered. (Professor Gordon's notation was used wherever possible to facilitate comparison). In model form, the net present value of the buy option would be written as follows. n(IlT)R1 n T NPVP=-C+ ( +E E (1) t=l (l+k)' t=l (l+i)
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