Leaminger Co Q51 12/02 amended

For the operating lease, the question says that the first payment is on 31 Dec 20X2 whereas for the finance lease the first payment is on 31 December 20X3. So the timing of the payments and the tax saving on them is different - hence the different discount factors.

When it is 1 to 4 you just use the normal annuity factor for 4 years. When it is 2 to 5, you have to take the 5 year annuity factor minus the 1 year annuity factor so as to be left with the total factor for years 2 to 5.

The rental is for years 0 to 3. The PV of a flow at time 0 is the same as the flow itself, so the factor is 1 The for years 1 to 3 it is the 3 year annuity factor which is 2.487. So the total factor is 1 + 2.487 = 3.487 The tax is for years 1 to 4, so it is the 4 year annuity factor, which is 3.170 (It might help you to watch the Paper F2 lectures on Interest and on Investment Appraisal, because the discounting itself at F9 is all revision of F2.)