Trial and error method in Lease - Printable Version +- Accountancy Forum (https://www.accountancy.com.pk/forum) +-- Forum: The Profession (https://www.accountancy.com.pk/forum/forumdisplay.php?fid=4) +--- Forum: Accounting and Audit (https://www.accountancy.com.pk/forum/forumdisplay.php?fid=7) +--- Thread: Trial and error method in Lease (/showthread.php?tid=2394) |
Trial and error method in Lease - faisalsha78 - 08-27-2005 Can any senior member define trial and error method used in lease when present value of minimum lease payment is more that fair value of leased asset.please define with example and what is its formula. - iahmad - 09-07-2005 IRR is the best example of this. IRR is the rate at which NPV is zero, and you have to estiamte the rate at which the NPV becomes Zero. follow the following formula "r1 + NPV1/NPV1-NPV2 * (r2-r1)" Where r1= interest rate at which NPV is positive r2= interest rate at which NPV is negative NPV1= Positive NPV NPV2= Negative NPV - Moon - 09-12-2005 Will u please explain your formula with example? ------------------------ Be careful! Words speak.... - iahmad - 09-13-2005 Given / Known Data Cost of a Vehicle = 50,000 P.M. Rental = 2,000 Lease term = 3 Total Lease payment = 2,000*12*3= Rs. 72,000 Required PV of Minimum Lease Payment(MLP)? Implist Interest rate? Solution By using IRR IRR is the rate at which NPV = 0, it means Cost - PV of MLP = 0 Let (bY hit & trial method) we use R2 = 12% PV of MLP = 72,000(1.12)^-3= Rs. 51,248 i.e 50,000 - 51,248 = Rs.1,248 Let we use R1 = 14% PV of MLP = 72,000(1.14)^-3= Rs. 48,597 i.e 50,000 - 48,597 = Rs.(1,403) Now as per formula R1+NPV1/NPV1+NPV2*(R2-R1) 12%+1,248/ (1248+1403) * (14-12) 12.94 OR 13% SO the impleset rate is 13% using the hit & trial method. If u need any further assistance, plz feel free to ask. Thanks - Moon - 09-15-2005 AOA, your formula is just good but there is one problem, that by using the rate determined by it, the NPV does not come out to zero and the actual rate at which it becomes zero is 25.45% pa. instead of above 12.94 or 13%. would you like to comment on that. further if you need, how i applied your results and prepared the lease amortization schedule plz send me an e-mail. ------------------------ Be careful! Words speak.... - waqas_jay - 09-15-2005 i want to know about share and share capital and debenture - iahmad - 09-15-2005 Moon, plz send your id. i will send you the work sheet containing the working of lease schedule using IRR method. Further follow the following calculation 50,000 - 72,000(1.13)^-3 NPV is Approx = 0 (Rounding off error) - Moon - 09-16-2005 please follow my id murtazamahmud@gmail.com, i will send u the application of your rate as well. ------------------------ Be careful! Words speak.... |