spreads

seems like i've been throwing this example around a lot, but here it is again:

o Ex. Lease PMT $200, r = 5%, lease term = 10 years, PV = 1544.35
o In the first year of the lease, you would have:
?X Lease payment of $200
?X Interest expense of $77.22 (operating CF)
?X Principal Payment of $122.78 (Financing CF)
?X End of year lease PV of 1421.57 (1544.35 ?V 122.78)
?X Depreciation expense of whatever; (management would choose depreciation method)

we'll assume straight line depreciation with $100 salvage value over 10 years.
also, we'll assume the book value of the asset $1550

depreciation = (1500-100)/10 = 140
then your interest expense = 77.22
so the two combined come to 227.22, ie greater than your $200 lease payment. the difference is more pronounced if you go with a double declining depreciation, which I don't feel like doing right now...

anyway, depreciation would keep being 140, but interest expense will be lower than 77.22 every year, and at some point $140 + int expense < $200.

this should spell out pretty clearly why net income would be lower initially under a capital lease than under an operating lease, but I haven't got a text in front of me and don't know what #9 asks, but I kicked that reading's @ss so I feel like this is probably helpful.

if not, sorry bout that.