Hello All, Please help me understanding how to calculate PV of Minimum Lease Payments. Here is the snapshot of question. Answer for this is 82 million. This is from Reading 27, FSA:Synthesis (Page # 300, CFAI Text) I am not able to understand how did they got 82 million to be added, to asset for converting operting lease to capital The company has no significant capital lease liabilities. Minimum rental payments under operating leases that have noncancellable lease terms in excess of 12 months are as follows: Operating In thousands leases 2000 $ 20,636 2001 $17,829 2002 $14,583 2003 $11,438 2004 $9,383 Later years $41,473 Minimum lease payments $115,342 The discount rate used is 8.39% How many years should we take into account ? 5 ? Actual Finanacial stmt link: https://www.cfainstitute.org/canservices/private/pdf/fsareadings/westvaco.pdf Your help will be greatly appericiated. -Thanks
CF1=20,636 CF2=17,829 CF3=14,583 CF4=11,438 CF5=9,383 CF6=41,473/5 F6=5 (last is for the next 5 years) I=8.39% CPT NPV = 82136 This is when you are trying to convert Operating leases - which are Off-balance sheet into a Long Term Asset and a Long Term Liability so that companies are more comparable on balance sheet terms. In this case the Minimum lease payments=$115,342 is not used.
Hello CPK123, Thanks for the reply I did not understand following line ? CF6=41,473/5 F6=5 (last is for the next 5 years) So We use CF6 = 8294.6, what is F6=5?, is there something I need to input in Calculator I do not get answer using CF1-CF6 and i=8.39 -Thanks,
Hi CPK123, I got it. Is there anyway to do enter cf6-cf10 as 8294.6, instead of keying single entry at a time. I was asking for HP Calculator. Also, when would you use MLP then ? and How ? How many years you have to take into account ?
on the HP12C Platinum calculator 8294.6 f CFj (this is the PMT button) 5 f Nj (this is the FV button) That is the way to enter multiple cash flows. The total payments provided are for 10 years. By disclosure requirements, the company is supposed to disclose for the next 5 years on an yearly basis and then lump up the next five years into 1 lumpsum.
in answer to your other question - the MLP for an Operating lease is nothing but a rental expense - which shows up only on the Income statement. Thus the Operating lease is completely off the Balance sheet. In the case of making adjustments for the Operating Lease to bring it on the Balance sheet - the following adjustments would be needed: 1. remove the rental expense from the Income statement. 2. Make the operating lease appear on the balance sheet - by treating it like you would treat a normal capital lease.
ThankS CP, However I was asking “when would you use MLP then ? and How ? How many years you have to take into account ?” in response to your comment “In this case the Minimum lease payments=$115,342 is not used.” -Thanks
Hi CP, In what situation would you use MLP, that is what I meant, if it was not clear from my previous reply. -Thanks
when converting a Operating lease to a capital lease and making adjustments - this would not be used. In this case it means the rental expense. Please refer to my post in between. In the traditional capital lease - it would be used to calculate the PV (MLP) with that amount being used as the minimum lease payment.
Thanks CP