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Walshey company has already decided to accept a project and is now considering how to finance it.
The asset could be leased over four years at a rental of $36000 per year, Payable at the start of each year. Tax is payable at 30%. One year in arrears. The post-tax cost of borrowing is 10%. Calculate NPV of the leasing optionSolution :
Year
0-3 Rental (36000) DF @10% (i.e., 1+2.487) = (125532)My doubt is while calculating the rental value why they have added 1 to the discounting factor to ?
It is because the first lease payment is payable at the start of the first year, which is time 0.
The present value of a flow ‘now’ (time 0) is the amount of the flow i.e. 1 x the amount of the flow.
The 3 year annuity factor gives the PV of flows from time 1 to time 3 and so the PV of all four flows in this case is obtained by multiplying by 1 + the three year annuity factor.
Have you watched all of my lectures, where this is explained? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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