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Week 5: Leasing (The basics of leasing (Lease payments and Residual values…

- - - - Step 1: Calculate the incremental CFs (lease-buy )
      - Step 2: Calculate the NPV of the incremental CFs using after- tax cost of debt
        
        negative number => leasing is not attractive
        
        positive number => leasing has more advantage than borrow
        
        cost of debt = rD x (1-tax)
- - - - lessee reported as operating expense
      - reported in the income statement but not in balance sheet
      - disclosed in the footnotes of financial statements
    - - long- term lease contract
      - reported in the balance sheet as it belongs to lessee
      - incurs depreciation expenses
      - PV of future lease payments as a liability (?)
      - deducts the interest portion of the lease payments as an interest expense
      - conditions (satisfy one of four is okay)
        
        Contains an option to purchase the asset at a bargain price that is less than its fair market value (99% that the lessee will exercise the option)
        
        Lease term is 75% or more of the estimated economic life of the asset
        
        Title of the property transfers to the lessee at the end of the lease term
        
        PV of the minimum lease payments at the start of the lease is 90% or more of the asset's fair market value