Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 4, Problem 51QAP
Summary Introduction
To compute: Monthly lease payments.
Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
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You are considering a loan vs a lease for a new piece of equipment. The price of the equipment is $34,500. You can obtain a five year loan for 4% APR compounded monthly. The other choice is a five year lease. What is the maximum interest rate (APR compounded monthly) the lease can be for payments to be equal to the loan payment? Assume you are making monthly payments.
Alternative Calculation of Monthly Lease Payment:
FV
PV
(1+ i)N
1
LP =
1
(1+i)N-A
i
+ A
where LP – monthly lease payment;
PV – the present value of the future payments on the lease,
including the residual value, i.e. it is a lease amount;
FV – the future value of leased asset or its residual value;
N- the lease term (number of months);
A - the number of payments to be paid in advance (0,1,2,...);
i- monthly interest rate (i = APR÷12).
The formula presented above can be used for any payment
frequency. Just be sure that N is the number of periods and į is the
interest rate per period.
Suppose you are a property owner and you are collecting rent for an apartment. The tenant has signed a one-year lease with $600 a month rent, payable in advance. Find the present value of the lease contract if the discount rate is 12% per year.
Chapter 4 Solutions
Corporate Finance
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