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Again this is a question from BPP exam kit, its a Lease Vs Buy question.
They’re asking the present value of using both finance lease and operating lease.My question to you is that both the leases has yr contract and the annuity factors will be same when Rental calculation is calculated, but for operating lease its different why is that
plus the tax on payments for finance lease has been calculated as Y1-Y5 factor minus Y1 factor, why is this? for operating lease they have taken 4yr anuuity factor 3.
170In simply can u explain me the annuity factors on both the leases for both rental and tax payment, confusing alot thnks in advance
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.
how do u get the annuity factor the operating lease?
both rentals and tax on rental?I mean how do u arrive
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 = 3.487The 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.)
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