Trial and error method in Lease

[faisalsha78]

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]

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]

Will u please explain your formula with example?

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Be careful! Words speak....

[iahmad]

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]

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.


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Be careful! Words speak....

[waqas_jay]

i want to know about share and share capital and debenture

[iahmad]

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]

please follow my id [email protected], i will send u the application of your rate as well.

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Be careful! Words speak....