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Algorithm for Lease Terms, Cost and Profit

Author

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  • David E. Vance

Abstract

Most elements of the weighted average cost of capital are easy to compute. Unlike bonds, mortgages and bank loans, the cost of lease capital is never stated. Leases vary widely in application fees, down payments, deposits, prepayments and length all of which make it difficult to specify the cost of lease capital in a consistent manner. Such terms also make it difficult to compare leasing to other forms of financing. Lessors have a similar problem. The return on capital invested in lease assets is difficult to calculate. A lease with a lower monthly payment may provide greater returns than one with higher payments if terms are properly specified. A problem that both lessees and lessors have is that the time value of money functions used to compute the lease cost of capital give rise to non-linear equations. Solution of those equations is beyond the skill of most finance and accounting practitioners. This article provides a standardized framework for specifying lease terms and an algorithm for solving the resulting non-linear equations. This algorithm can be implemented using common spreadsheet software.JEL classification numbers: G23, G32, D24Keywords: Lease, Lease Cost, Lease Terms, Cost of Capital, Lease Profit

Suggested Citation

  • David E. Vance, 2018. "Algorithm for Lease Terms, Cost and Profit," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(6), pages 1-7.
    • Handle: RePEc:spt:apfiba:v:8:y:2018:i:6:f:8_6_7
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    More about this item

    Keywords

    lease; lease cost; lease terms; cost of capital; lease profit;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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