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# Lease Evaluation

1
Basic Mathematics
• Use of
• PVIF/ PVIFA
• Type of Annuity
• Regular Annuity (PVIFA) Vs Annuity-Due (PVIFA)
• Regular Annuity PV = A * PVIFA (i,n)
• Annuity Due = A + A* PVIFA (i, n-1)
• Flat Rate Vs Effective Rate of Interest
• Effective Rate = 2F{n/(n+1)}

2
PV of Annuity payable at interval
less than a year
• Lease quotes
Lease Term Rate
3 years 36PTPM (Arrear)
Marginal Cost of Debt = 16%
PV (3 Years) = (36*12) * PVIFA 12(16%,3)
= 432 * i/i^12 * PVIFA (16%,3)
=432 * 1.0714 * 2.246 = 1039.549

## PV (5 Years) = (25*12) * PVIFA 12 (16%,5)

= 300 * i/d^12 * PVIFA (16%,5)
= 300 * 1.0847 * 3.274 = 1065.392

3
Lease Evaluation - Lessee
• Financial
• Non- Financial Factors
– Simple documentation
– Expeditious sanction
– Post sanction reporting
– Flexibility
– Financial Position/Experience of Lessor

4
Models for Evaluation
• Debt includes Lease • Lease is a substitute
to debt
• Investments are
funded with a mix of • Equivalent Loan
debt, equity & lease Model
• Bower-Herringer-
• Weingartner’s Model Williamson
Model(BHW)
• Bower Model

5
Weingartner’s Model
• Leasing and buying as two ways of investing in
an asset
• Evaluate lease as an Investment alternative
– Lease if NPV(L) > NPV(B) > 0
– Buy if NPV (B) > NPV (L) > 0
• Discount Rate – Marginal Cost of Capital
• K = D/(D+E) x kD(1-T) + E/(D+E) x kE

6
Weingartner’s Model
• NPV (B) = - Initial Investment + PV of EBDIT x (1-T) +
PV (Tax Shield of Depreciation) + PV of Net salvage
Value
• NPV (L) = -PV of Lease Rental + PV of EBDIT x (1-T) +
PV (tax Shield on Lease Rentals) – Management Fee +
PV (Tax Shield on Management Fee)
• NAL = NPL – NPV = Initial Investment - PV (Tax Shield
of Depreciation) - PV of Net salvage Value - PV of Lease
Rental + PV (tax Shield on Lease Rentals) –
Management Fee + PV (Tax Shield on Management
Fee)

7
Equivalent Loan Model
• Asset will be debt financed
• Lease is a substitute to debt
• Discount rate = Marginal Cost of Debt
• Net value of lease = Initial Investment - PV (Tax Shield
of Depreciation) - PV of Net salvage Value - PV of Lease
Rental + PV (tax Shield on Lease Rentals) –
Management Fee + PV (Tax Shield on Management
Fee) – PV (Interest tax shield on displaced debt
• Amount borrowed = PV of Lease payment
8
Bower-Herringer-Williamson (BHW)
• Cash Flow Stream – Financing & Operating
• FAL = PV of Loan Payment – P.V. of Lease
Payments
• OAL = PV of Lease Related tax Shield – PV of
loan related tax shields – PV of Residual Value
• If FAL+OAL > 0 -Lease
• If FAL + OAL < 0 - Borrow and Buy
• Discount Rate
• PV of Lease Payment – pre-tax marginal cost of debt
• OAL – post tax marginal cost of capital
• Amount Borrowed = Cost of Asset
9
Bower Model
• COP = Initial Investment - PV (Tax Shield of
Depreciation) - PV of Net salvage Value
• COL = PV of Lease Rental - PV (tax Shield on Lease
Rentals) + PV (Tax Shield on Interest)
• Decision
• COL<COP – Lease
• COL > COP – Buy
• Discount Rate
• Tax Shields - unspecified rates
• Net salvage value – marginal cost of capital
• Lease Rental – pre-tax cost of debt
• Amount borrowed = Cost of Asset
10
Suggested Framework
• NAL= Initial Investment - PV (Tax Shield of Depreciation)
- PV of Net salvage Value - PV of Lease Rental + PV
(tax Shield on Lease Rentals) – Management Fee + PV
(Tax Shield on Management Fee) – PV (Interest tax
shield on displaced debt
• Amount borrowed = PV of Lease payment
• Discount Rate
• PV of Lease Payment – pre-tax marginal cost of
debt
• Tax shield/salvage value – marginal cost of capital

11
Break Even Lease Rental
• Point of indifference between lease and