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PV of Lease Payments Formula:
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The Present Value (PV) of lease payments calculates the current worth of a series of future lease payments, discounted at an appropriate interest rate. It helps in evaluating the true cost of leasing versus purchasing assets.
The calculator uses the lease payment present value formula:
Where:
Explanation: The formula discounts each future payment back to present value terms, accounting for the time value of money.
Details: Calculating the present value of lease payments is crucial for financial decision-making, lease vs. buy analysis, accounting compliance (ASC 842/IFRS 16), and understanding the true economic cost of leasing arrangements.
Tips: Enter the monthly payment amount in dollars, the monthly interest rate as a decimal (e.g., 0.005 for 0.5%), and the number of months in the lease term. All values must be positive numbers.
Q1: Why calculate present value of lease payments?
A: It helps compare leasing costs with purchase prices, assists in financial planning, and is required for proper accounting treatment under current lease accounting standards.
Q2: How do I convert annual rate to monthly rate?
A: Divide the annual percentage rate by 12 (number of months) and convert to decimal (divide by 100 if percentage).
Q3: Does this calculation include upfront payments?
A: No, this formula calculates only the present value of regular monthly payments. Upfront payments should be added separately to the total present value.
Q4: What if the lease has irregular payments?
A: This calculator assumes equal monthly payments. For irregular payments, each payment must be discounted separately and summed.
Q5: How does residual value affect the calculation?
A: This formula doesn't account for residual value. For leases with buyout options or residual values, additional calculations are needed.