http://financialexamhelp123.com/leases-ii-calculations/
Going down to the calculations:
PV=100,000
n=5
i=8%
FV=-10,000
solve for PMT.
When I first did this without looking at what he put as the inputs, I used a positive 10,000 for FV. I can remember to do this in the future, but can’t wrap my head around why you make it negative. If it’s current value is 100,000 positive and gets knocked down to 10,000 at the end of year five, shouldn’t FV also be positive?
(props to magic man for the website.)
Think of it as what’s flowing into and out of the business. At time 0, a big piece of equipment worth $100,000 is flowing in (positive for the business). At the end of each year for 5 years, I have to send out PMT dollars (negative) to the lessor and at the end of the lease, I send out $10,000 (negative).
Oh, so at the end of the lease I have to cut a check for 10,000 to finish out the lease? I guess I never knew that is how it’s done, I just assumed that the only cash outflow was your PMT dollars in leases.
Amen!
I need to write an article on using the cash flow buttons on your calculator. The key point, as breadmaker highlights, is that they’re cash flow buttons: you have to consider the sign on each number (PV, PMT, FV) according to whether it’s a cash inflow or a cash outflow.
I appreciate your kind words. I’m glad that the website’s a help.
Yes: you’re (essentially) promising that the equipment will be worth $10,000 at the end; you either have to return equipment worth that much, or pay for it.