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Are the calculations of these still examinable if so can you point me out in the notes where I can get their formats and methods, I couldn’t locate them in the notes myself 🙁
Or better yet if you can quickly tell me what should be include in our Finance Lease NPV calculations and what we should include in our Operating Lease calculations.
Thanks
Nevermind sir I have found these in my personal notes.
But I do want to know a few things regarding December 2002 paper question #4 ” LEAMINER PLC ”
#1 There is no borrowing rate given in the question so is it assumed to use the COP rate of 10% in our calculations?
#2 Are the Finance and Operating Lease still examinable separately like in this question?
#3 There is no mention of how many period we will take the Operating Lease for, so how do we know how many periods of rental to charge in our timeline? Since the Operating Lease starts from December 2002, when will it finish? The examiner has taken four periods only starting from December 2002 till December 2005, so I’m a bit confused here. Is it because the rent is payable in advance so a payment till December 2005 will infact cover till December 2006?
1 Usually we would make the decision by discount at the after-tax cost of borrowing. However since the only rate given here is the cost of capital then we must use this. (I am not sure what you mean by COP 🙂 )
2 Although he has never asked finance and operating leases since this question, there is no reason why he should not. There is no extra knowledge needed because he gives the cash flows in each case and that is all we need.
3 Since the question says (under the buying option) that the machine will be redundant after 4 years, we need to look at the cash flows under each option for the 4 years we will need it. I do not have the actual exam question and answer (because it is so old) but BPP’s is wrong. They have taken flows for three years, but it should be for 4 years.
Thanks for the detailed and quick reply sir 🙂
I meant COC not COP sorry about that 🙂
Regarding #3, maybe the examiner took till three years because the rent is payable in advance under lease option so a payment till December 2005 will infact cover till December 2006, so it does cover 4 years, am I right?
Not really. In other types of NPV questions we assume that the cash flows occur at the ends of year, but in this question we are told that they occur at the start of each year.
However, if we are keeping the machine for 4 years then we will still need to make 4 payments – one for each year.
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