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The following costs are given for a seven year lease…
| Description | Unit | Price Per Unit | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total Cost |
| Lease Expense | $10,000 | $10,000 | 10,000 | 10,000 | 10,000 | 10,000 | $50,000 | ||
| Sales Annual Service Agreement Fee | 1 | $2000 | $2000 | 2000 | 2000 | 2000 | 2000 | $10,000 | |
| Initial Training | 1 | $2000 | $2000 | ||||||
| Maintenance Fee | $1000 | 1000 | 1000 | 1000 | 1000 | $5000 | |||
| In-kind Maintenance Fee for Speciallized Maintenance | $1000 | 1000 | 1000 | 1000 | 1000 | $5000 | |||
| Replacement Equipment | $200 | 200 | 200 | $600 | |||||
| Total Costs | $12,000 | $2000 | $14,000 | $14,200 | $14,200 | $14,200 | $72,600 |
Straight Line Depreciation yearly depreciation = $7134.29 ($50K initial cost, $60 salvage value of replacement equipment, 5 year lease). $10,000 in income expected to be gained in years 1 – 5 for a total of $50,000. Tax rate is 20% of net income. Cost of capital is 10%.
Question…
This is for an Operating Lease agreement.
A) Can you please demonstrate how you would calculate the cash flows? Also, Total Cash Out (Future Value) and how to calculate Total Cash Out Present Value for each year of the lease?
Would you need to subtract a depreciation expense for each year and then add it back for cash flows?
Also, how you would calculate the Net Present Value (do you need to use an external table?), Discount Rate or Hurdle Rate and Internal Rate of Return?
Formulas with an explanation would be greatly appreciated.
Thank you. I am more interested in learning the WHY and HOW than anything else. Thanks!!!
Expert Answer
