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% |