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.
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
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....
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)