SIMPLE LEASE METHOD

Asset cost 600,000

Interest rate 12%
Life of asset 6
Lease rental payment 140,000
Annual depreciation 100,000
Tax rate 40%

Leasing The Asset

YEAR 0 1 2 3 4 5
LEASE RENTAL PAYMENT 140,000 140,000 140,000 140,000 140,000 140,000
LEASE RENTAL AFTER TAX 84000 84000 84000 84000 84000 84000
PV $386,801.20

Buy the asset

year 0 1 2 3 4 5
cost of asset 600,000
depreciation tax shield 40000 40000 40000 40000 40000
pv value of dep tax shield $164,456.29
actual cost of asset $435,543.71

decision lease
 6

40000
EQUIVALENT LOAN METHOD
Asset cost 600,000
Interest rate 12%
Life of asset 6
Lease rental payment 140,000
Annual depreciation 100,000
Tax rate 40%
After tax interest rate 7.20%

Ater tax cash flows from leasing

Year 0 1 2 3 4
After-tax rental -84000 -84000 -84000 -84000 -84000

After tax cash flows from buying the asset

Asset cost -600,000
depreciation tax shield 40000 40000 40000 40000
net cash flow from buying -600,000 40,000 40,000 40,000 40,000

Differential cash flow: lease saves lessee

lease minus buy 516,000 -124,000 -124,000 -124,000 -124,000

IRR of diff cash flow 8.30%

IRR of borrowed money 7.20%
decision

After tax
Loan Repaymen
Principal at loan
Year payment Interest t of
beg. Year repaymen
end year principal
t

1 532070.12 149539.37 63848.414 85690.952 124000

2 446379.17 145426.2 53565.5 91860.7 124000
3 354518.47 141016.89 42542.216 98474.67 124000
4 256043.8 136290.1 30725.255 105564.85 124000
5 150478.95 131223 18057.474 113165.52 124000
6 37313.433 41791.045 4477.6119 37313.433 40000
 5 6
-84000

40000 40000
40,000 40,000

-124,000 -40,000

Lease
minus buy
cash flows
year 1-6

-124,000
-124,000
-124,000
-124,000
-124,000
-40,000
CALCULATING MINIMUM ACCEPTABLE LEASE RENTAL TO LESSOR
Asset cost 600,000
Interest rate 12%
Residual value 0
Life of Asset 6
Tax rate 40%
Annual depreciation 100,000
After tax interest rate 7.20%
Lease rental payment 134,739 Goal seek

After tax cash flow from leasing

Year 0 1 2 3 4
Lessor After tax lease rental 80843.366 80843.366 80843.366 80843.366 80843.366

Lessor after tax cash flows from buying the asset

Asset cost -600,000
Depreciation tax shield 40000 40000 40000 40000
Net cash flow from buying -600,000 40,000 40,000 40,000 40,000

Lessor Total cash flows

Lease rental+Net cash flow from buying -519,157 120,843 120,843 120,843 120,843

IRR of Lessor cash flows 7%

 5 6
80843.366

40000 40000
40,000 40,000

120,843 40,000
LEASE OR BUY DECISION WITH RESIDUAL
Asset cost 600,000
Interest rate 12%
Residual value 100000
Life of Asset 6
Tax rate 40%
Annual depreciation 83,333
After tax interest rate 7.20%
Lease rental payment 100,000 Goal seek

After tax cash flow from leasing

Year 0 1 2 3 4 5
Lessor After tax lease rental 60000 60000 60000 60000 60000 60000

Lessor after tax cash flows from buying the asset

Asset cost -600,000
Depreciation tax shield 33333.333 33333.333 33333.333 33333.333 33333.333
Residual Income
Net cash flow from buying -600,000 33,333 33,333 33,333 33,333 33,333

Lessor Total cash flows

Lease rental+Net cash flow from buying -540,000 93,333 93,333 93,333 93,333 93,333

IRR of Lessor cash flows 1.02%

 6 7

33333.333
60000
33,333 60,000

33,333 60,000
Finance Lease
Asset cost 600,000
Interest rate 12%
Life of Asset 6
Tax rate 40%
Residual value in year 7 80000.00
Annual depreciation 86,667
After tax interest rate 7.20%
Lease rental payment 251,266
Auction buying price at the end 60000

After tax cash flow from leasing

Year 0 1 2 3
Lessor After tax lease rental 150759.67 150759.7 150759.7 150759.7
Auction buying price
Net cash flow from leasing 150759.67 150759.7 150759.7 150759.7

Lessor after tax cash flows from buying the asset

Asset cost -600,000
Depreciation tax shield -34666.67 -34666.67 -34666.67
Residual Income
Net cash flow from buying -600,000 -34,667 -34,667 -34,667

Lessor Total cash flows

Net Cash flow from leasing+Net cash flow from buying -449,240 116,093 116,093 116,093

IRR of Lessor cash flows 8.20%

Post Tax Interest rate 7.20%
Irr of lessor with spread of 1% point 8.200%
 4 5 6 7
150759.7 150759.7
60000
150759.7 150759.7 60000 0

-34666.67 -34666.67 -34666.67

-48000.00
-34,667 -34,667 -34,667 -48,000

116,093 116,093 25,333 -48,000

Leveraged lease rental
Asset cost 1000000 Depreciation Schedule
Lease term 15 Year Dep.
Interest rate 10% 1 14.28%
Equity 200000 2 24.49%
Debt 800000 3 17.49%
Residual value 300000 4 12.50%
Annual lease rental 239788 5 8.92%
Tax rate 40% 6 8.92%
Annual debt payment 105179 pmt 7 8.92%
8 4.48%

Eq. Invested Rental or Principal Principal

Year in the beg. Salvage Dep. at beg. EAI Int. Repaid
0 -200000
1 143873 142800 800000 105179 80000 25179
2 143873 244900 774821 105179 77482.098 27697
3 143873 174900 747124 105179 74712.405 30467
4 143873 125000 716657 105179 71665.744 33513
5 143873 89200 683144 105179 68314.416 36865
6 143873 89200 646280 105179 64627.956 40551
7 143873 89200 605728 105179 60572.849 44606
8 143873 44800 561122 105179 56112.232 49067
9 143873 0 512056 105179 51205.553 53973
10 143873 0 458082 105179 45808.206 59371
11 143873 0 398711 105179 39871.124 65308
12 143873 0 333403 105179 33340.335 71839
13 143873 0 261565 105179 26156.466 79023
14 143873 0 182542 105179 18254.21 86925
15 143873 0 95617 105179 9561.7292 95617
16 0 0 0 0 0.00 0
17 0 0 0 0 0.00 0
18 0 0 0 0 0.00 0
19 0 0 0 0 0.00 0
20 0 0 0 0 0.00 0

IRR 6%
 Cash flow
Residual for lessor
-200000
0 13573.65
0 -28273.51
0 -1381.388
0 17359.95
0 30339.42
0 28864.83
0 27242.79
0 43218.54
0 59175.87
0 57016.93
0 54642.1
0 52029.78
0 49156.24
0 45995.33
0 42518.34
180000 -180000
0 0.00
0 0.00
0 0.00
0 0.00