Final answer:
The interest rate implicit in a lease refers to the expected rate of return for the lessor, while the lessee's incremental borrowing rate is the rate the lessee would pay to borrow funds to purchase the asset.
Step-by-step explanation:
In the context of leasing, the 'interest rate implicit in a lease' refers to the rate of return that the lessor (the owner of the asset) expects to earn from the lease contract. It is the discount rate that, when applied to the stream of lease payments, would make the present value of those payments equal to the fair value of the leased asset. On the other hand, 'the lessee's incremental borrowing rate' is the rate of interest that the lessee (the party leasing the asset) would have to pay to borrow funds to purchase the asset. It is the rate that the lessee would have to pay from other sources to acquire a similar asset on the same terms and conditions.
For example, let's say a company wants to lease a vehicle. The lessor may have an interest rate implicit in the lease of 5% per year, which reflects the return they expect from leasing the asset. Alternatively, the lessee's incremental borrowing rate may be 6% per year, which is the rate the lessee would have to pay to finance the purchase of a vehicle. These rates are used to calculate the lease payments and determine the overall cost and viability of the lease agreement.