Question

Verizon Communications, Inc., provides the following footnote relating to its leasing activities in its 10-K report.

The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2015, are as follows:

Years ($ millions)	Capital Leases	Operating Leases
2016	$302	$2,744
2017	278	2,486
2018	187	2,211
2019	97	1,939
2020	45	1,536
Thereafter	159	7,297
Total minimum rental commitments	1,068	$18,213
Less interest and executory costs	111
Present value of minimum lease payments	957
Less current installments	271
Long-term obligation at December 31, 2015	$686

Using your financial calculator or Excel Spreadsheet, confirm that Verizon capitalized its capital leases using a rate of 3.85%

N	Amount
0
1
2
3
4
5
6
7
8
9

Compute the present value of Verizon's operating leases, assuming an 3.85% discount rate and rounding the remaining lease term to 3 decimal places. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each Present Value answer to the nearest whole number.)

($ millions)	Present Value
Year 1
Year 2
Year 3
Year 4
Year 5
After 5
Total

Answer 1

(a) The excel spreadsheet below represents the present value of capital leases computed @ 3.85%. The present value of future capital lease payments computed below is $957 millions which is equal to the Present value of minimum lease payments as given in the question above. Hence, it justifies that Verizon capitalized its capital leases using a rate of 3.85%.

Year	Capital leases ($ miilions) (A)	PVF @ 3.85% (B)	Present Value ($ miilions) (A)*(B)
1	302	0.963	291
2	278	0.927	258
3	187	0.893	167
4	97	0.860	83
5	45	0.828	37
6	45	0.797	36
7	45	0.768	35
8	45	0.739	33
9	24	0.712	17
Present value of capital leases	957

(b) The present value of operating leases has been computed in the excel spreadsheet below:

Year	Operating lease ($ miilions) (A)	PVF @ 3.85% (B)	Present Value ($ miilions) (A)*(B)
Year 1	2,744	0.963	2,642
Year 2	2,486	0.927	2,305
Year 3	2,211	0.893	1,974
Year 4	1,939	0.860	1,667
Year 5	1,536	0.828	1,272
After 5^	1,536	3.533	5,426
Total present value	15,286

^Cash flows after 5 is computed as follows:

Remaining life after 5 years = 7297/1536 = 4.751 years

Present value after 5 = 1536*PVIFA (3.85%, 4.751)*PVF(3.85%,5)

= 5,426