Question: Lease period is 10 years Lease payments are $2,980.59, due at the end of each year. The firm will own the asset at the end of the lease term, and there will be a negligible salvage value. 8.5% is firm’s incremental borrowing rate 8.0% is implicit lease rate If the company uses straight-line depreciation, the first year’s reported lease expense is: …$3,600 is the answer. How do “the answer people” get there?
PV (MLP) = 20000 Lease Expense = Depreciation Expense + interest Expense Interest Expense = 20000 * .08 = 1600 Depreciation Expense = 20000/10 = 2000 Total = 3600
PV of lease pmts is 20,000 20,000 * .08 = 1600 + 2000 depreciation = 3600