Question

Scenario 1: Here are some inputs for a noncancellable lease arrangement: .Semi-annual lease payment: $16,000 (used to determine PMT) Implicit rate: 7.5% (used to determine l/Y maybe?) incremental borrowing rate: 7% (used to determine I/Y maybe?) Lease term: 4 years (used to determine N) Unguaranteed residual value: $15,000 (used to determine FV maybe?) Calculate the present value of the minimum lease payments from the viewpoint of both the lessor and the lessee: PV of the minimum lease payments (lessor): PV of the minimum lease payments (lessee):

Answer 1

a. Calculation of Present Value of the minimum lease payments from the viewpoint of lessor :-
	Implicit rate of return (p.a.)		r		7.50%
	Implicit rate of return (per semi-annual)		7.50%/2		3.75%
	Lease term (years)		n		4
	No. of Semi-annual lease payments		4*2		8
	Semi-annual lease payment		PMT		$                                      16,000
	Unguaranteed Residual Value				$                                      15,000
Note:	Assuming lease payments are made at the end of semi annual period
	Present Value of 8 semi-annual lease payments	=	$16,000	×	PVAD (3.75%,8)
		=	$16,000	×	6.802796
		=	$108,845
	Present value of the lease payments	=	$108,845
	Present Value of Unguaranteed Residual Value	=	$15,000	×	PV (3.75%,8)
		=	$15,000	×	0.744895
		=	$11,173
	Present Value of the minimum lease payments from the viewpoint of lessor	=	Present value of the lease payments	+	Present Value of Unguaranteed Residual Value
		=	$108,845	+	$11,173
		=	$120,018
b. Calculation of Present Value of the minimum lease payments from the viewpoint of lessee :-
	Incremental borrowing rate (p.a.)		r		7.00%
	Incremental borrowing rate (per semi-annual)		7.00%/2		3.50%
	Lease term (years)		n		4
	No. of Semi-annual lease payments		4*2		8
	Semi-annual lease payment		PMT		$                                      16,000
Note:	Assuming lease payments are made at the end of semi annual period
	Present Value of 8 semi-annual lease payments	=	$16,000	×	PVAD (3.50%,8)
		=	$16,000	×	6.873956
		=	$109,983
	Present value of the lease payments	=	$109,983
	Present Value of the minimum lease payments from the viewpoint of lessor	=	Present value of the lease payments
		=	$109,983

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