4.6 Financing Lease (Solution to Question #1)


We already learned how to calculate payments for an amortized loan or mortgage. The relevant formula, you will recall, is:

Principal = Periodic Payment x Present Value Annuity Factor


Further, you will recall, that from the above formula, we derived the following:

Periodic Payment = Principal/PV Annuity Factor
Interest = Opening Balance x Rate

Principal Payment = Periodic Payment less Interest
Balance = Beginning Balance less Principal Payment


Using what we know about the Time Value of Money and the calculation of amortized loans, the balance sheet value of the lease is the PV of the annuity stream:

Annual Payment × PVAF (5%, 15 years) =
$200,000 × 10.3797 = $2,075,940


The balance sheet would reflect these figures, as noted below:


Before  Inception  Before  Inception 
Current Assets $200 $200 Current Liabilities $100 $100
Leased Equipment 2,076 Lease Obligation 2,076
Fixed Assets 1,800 1,800 Long- term Debt 900 900
Equity 1,000 1,000
Total Assets $2,000 $4,076 Total Debt + Equity $2,000 $4,076
Debt Ratio 50% 75.46%



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