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13500 & | | Stores car’s value in PV. | ||
(Money paid out by lessor.)
7500 | | | Stores purchase option |
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| value in FV. (Money |
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Calculates monthly payment received.
Example: Present Value of a Lease with Advance Payments and Option to Buy. Your company is leasing a machine for 4 years. Monthly payments are $2,400 with two payments in advance. You have an option to buy the machine for $15,000 at the end of the leasing period. What is the capitalized value of the lease? The interest rate you pay to borrow funds is 18%, compounded monthly.
47
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| 12; Begin mode |
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| 44 | 45 | 46 | 47 |
| 48 |
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| _2,400 |
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| －4,800 |
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| _15,000 | ||||
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The problem is done in four steps:
1.Calculate the present value of 47 monthly payments in Begin mode. (Begin mode makes the first payment an advance payment.)
2.Add one additional payment to the calculated present value. This adds a second advance payment to the beginning of the leasing period, replacing what would have been the final (48th) payment.
3.Find the present value of the buy option.
4.Add the present values calculated in steps 2 and 3.
5: Time Value of Money 75
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