Question

Lessor leases asset to lessee. Lease term is 5 years. Lease payment is $20,000/month +
greater of $5,000 or 2% of lessee’s monthly sales revenue. Lessor’s implicit rate is 12%/year and this
rate is known by lessee. Payments are due at the end of the month. No payment was due at the signing of
the lease.

Required
1. Calculate the present value of the lease payments that will be used in measuring the lessee's lease
payable.

Please show calculations/explain.

Answer 1

Calculation of lease payments present value.

( IN $)

Years	Lease pay	Present value factor 12%	Present value =Lease pay* PVF
1	25,000.00	0.89	22,320.00
2	25,000.00	0.80	19,927.50
3	25,000.00	0.71	17,792.50
4	25,000.00	0.64	15,887.50
5	25,000.00	0.57	14,185.00
Total			90,112.50

Formula to calculate prsent value factor is as follows

1	Present value Factor =	1
		(1+ r)n

therefore, pv for 1st year is 1/(1+0.12)¹

=1/1.12   

= 0.89

For 2nd year =1/(1+0.12)²

^=1/(1.12)2

^=1/1.2544

=0.80

• In the same way factor is calculated for other years.
• Factor can be calculated using log table also.
• But, its always better to use formula .

Present value will be equal to Present value factor multiplied by future payments .

• Lease payment is equal to $20000 per month +greater of 5000 or 2% of sales. Since the monthly revenue is not kown its assumed that $5000 is greater than 2% of monthly sales revenue.
• Higher the rate of interest lesser the present value vice-versa.

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