# 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:

(000)

 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%