For the Operating Lease when reported by Lessor, why is the “depreciation expense” reported under the Operating Lease instead of under the Direct Financing Lease?
In the Kaplan note page 236 and 237 of book 1, it mentions that " cash flows from simulations are not risk adjusted and should not be discounted at risk free rate." However, in the next page, it states that" Decision trees and Simulations can be used as complements to risk adjusted valuation or as substitutes for such valuation. If used as a substitute, the cash flows in an investment are discounted at risk free rate and then the expected value obtained is evaluated in conjunction with the variability obtained from the analysi s." Are these two sentences conflict with each other? Can someone help explain, please? Thanks!
Q1: Think of yourself as the lessor. You buy a single family home in a nice neighborhood and rent it out on a two-year lease to a nice young couple. You still own the house, so you take the depreciaiton on your taxes. Your tennants sure can’t take any depreciation. It is just plain ole’ rent expense to them.