3401049 - Applied Interest Days for Net Present Value Calculation

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:

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.

1. In the Lease Contract Management work center go to the Lease Contract view.
2. Find lease contract ABC. 
3. Via button Reports open Report: Lease Contract Valuation Cash Flow . 
4. In Key Figure Settings add the attribute Net Present Value.

The report produced the following values for applied example lease contract ABC.

As well as derived values for:

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).

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

Note: If it is one month lease contract (e.g 01/10/2024 - 31/10/2024), then the days are calculated as 01/10/2024 - 31/10/2024 = 30 days instead of 31 days.

KBA , AP-ACC-LM , Accounting Lease Management , Problem