Symptom
The Net Present Value (NPV) of a lease contract is calculated using the Discounted Cash Flow Model (DCF). This implies a series of discounted lease payments (R).
The NPV of a single lease payment would follow the formula:
The example basic lease contract over 1 year has the following parameters:
Leasing Installment: | 10,000.00 USD |
Payment Form: | In Arrears |
Interest: | 5% |
Start Date: | 16.10.2023 |
Term End Date: | 15.10.2024 |
Recurrence: | Yearly |
Every: | 1 Year(s) |
Month of the Year: | 10 |
According to provided DCF formula you would expect the following NPV:
10,000 USD /(1+0.05) = 9,523.80 USD
The NPV, however, is calculated as 9,517.36 USD.
Reproducing the Issue
- In the Lease Contract Management work center go to the Lease Contract view.
- Find lease contract ABC.
- Via button Reports open Report: Lease Contract Valuation Cash Flow .
- In Key Figure Settings add the attribute Net Present Value.
The report produced the following values for applied example lease contract ABC.
Net Present Value: | 9,517.36 USD |
As well as derived values for:
RoU Asset Opening Balance Company Currency: | 9,517.36 USD |
Lease Opening Balance Company Currency: | 9,517.36 USD |
Cause
For the true periodical lease payment calculation you have applied 365 days.
According to financial lease calculation standards for interest calculation a Financial Year consists of 360 days. This is considered in the discount factor (DF) when discounting a lease payment according to a date in the future (t).
Resolution
The lease payment is due after 365 days on 15/10/2024.
This will have to be related to 360 days. For a lease payment due in 1 year the mathematical power (t) will compute as 365/360.
For a 1 year Lease Calculation (In Arrears) the NPV for lease payment R would compute as.
10,000 USD
---------------------------------
(1 + 0.05); Power (365/360)
I.e. The Lease Payment (R) will be discounted by discount factor DF.
In MS Excel:
=1/POWER((1+0.05),365/360) = Discount Factor (DF) = 0.951735798
The NPV will compute as:
In MS Excel:
=ROUND(10,000* DF,2)
= 9,517.36
Keywords
KBA , AP-ACC-LM , Accounting Lease Management , Problem