When evaluating a lease, how do APR and IRR differ?

When evaluating a lease, how do APR and IRR differ?

• A. APR is the rate of return on the lease's cash flows; IRR is the annualized cost rate.
• B. APR measures timing of cash flows; IRR ignores timing.
• C. IRR is the simple annual rate; APR accounts for timing.
• D. APR is the annualized cost rate; IRR is the rate of return on the lease’s cash flows; IRR captures timing and magnitude of cash flows.

Answer: (D)

APR represents the annualized cost of financing the lease. It tells you, in percentage terms, how much the lease costs each year, including interest and certain fees, but it doesn’t reflect the exact cash-flow pattern of the lease—the when and how much of every payment. IRR, on the other hand, is the rate of return you would earn from the actual sequence of lease cash flows. It’s found by considering every payment, any upfront amounts, and any residuals or buyout, and it accounts for when those payments occur as well as how large they are. Because of that, IRR captures both timing and magnitude of the cash flows. That distinction makes the statement that APR is the annualized cost rate and IRR is the rate of return on the lease’s cash flows—while IRR reflects timing and magnitude—the most accurate description.

APR represents the annualized cost of financing the lease. It tells you, in percentage terms, how much the lease costs each year, including interest and certain fees, but it doesn’t reflect the exact cash-flow pattern of the lease—the when and how much of every payment.

IRR, on the other hand, is the rate of return you would earn from the actual sequence of lease cash flows. It’s found by considering every payment, any upfront amounts, and any residuals or buyout, and it accounts for when those payments occur as well as how large they are. Because of that, IRR captures both timing and magnitude of the cash flows.

That distinction makes the statement that APR is the annualized cost rate and IRR is the rate of return on the lease’s cash flows—while IRR reflects timing and magnitude—the most accurate description.