A

1
2
3
4
5
6
7
8
9
10
11

BASIC LEVERAGED LEASE EXAMPLE

Cost of asset
Lease term
Residual value
Equity
Debt
Interest
Annual debt payment
Annual rent received
Tax rate

Year

1,000,000
15
300,000 <-- Realized year 16
200,000
800,000 <-- 15-year term loan, equal payments of interest and principal
10%
105,179 <-- =PMT(B7,B3,-B6)
110,000
40%
Equity
Invested

Rental or
Depreciation
salvage

Principal
Loan
Repayment Cash flow to
at start
Interest
payment
of principal
equity
of year
-200,000
800,000 105,179 80,000
25,179
49,941
<-- =(1-tax)*C14+tax*D14-(1-tax)*G14-H14
774,821 105,179 77,482
27,697
89,774
747,124 105,179 74,712
30,467
60,666
716,657 105,179 71,666
33,513
39,487
683,144 105,179 68,314
36,865
23,827
646,280 105,179 64,628
40,551
22,352
605,728 105,179 60,573
44,606
20,730
561,122 105,179 56,112
49,067
1,186
512,056 105,179 51,206
53,973
-18,697
458,082 105,179 45,808
59,371
-20,856
398,711 105,179 39,871
65,308
-23,231
333,403 105,179 33,340
71,839
-25,843
261,565 105,179 26,156
79,023
-28,716
182,542 105,179 18,254
86,925
-31,877
95,617
105,179
9,562
95,617
-35,354
180,000

12
13
0
-200,000
14
1
110,000
142,800
15
2
110,000
244,900
16
3
110,000
174,900
17
4
110,000
125,000
18
5
110,000
89,200
19
6
110,000
89,200
20
7
110,000
89,200
21
8
110,000
44,800
22
9
110,000
23
10
110,000
24
11
110,000
25
12
110,000
26
13
110,000
27
14
110,000
28
15
110,000
29
16
300,000
30
31
32
33 Data table: NPV of leveraged lease cash flows
34
103,389 <-- =I13+NPV(A34,I14:I29) , table header
35
0%
103,389
36
1%
88,796
37
2%
76,064
38
3%
64,865
120,000
39
4%
54,936
100,000
40
5%
46,062
41
6%
38,068
80,000
42
7%
30,810
60,000
43
8%
24,173
40,000
44
9%
18,062
45
10%
12,397
20,000
46
12%
2,164
0
47
14%
-6,916
5%
10%
-20,000 0%
48
16%
-15,108
49
18%
-22,596
-40,000
50
20%
-29,509
-60,000
51
22%
-35,940
52

IRR of cash flows

12.46%

NPV of Equity Cash Flows

15%

20%

25%

<-- =IRR(I13:I29)

Cash flows from Leveraged Lease

180,000
160,000
140,000

120,000
100,000
80,000
60,000
40,000
20,000

Year

0
-20,000
-40,000
-60,000
-80,000

-100,000
-120,000
-140,000
-160,000
-180,000
-200,000

10

11

12

13

14

15

16

COMPUTING THE LOAN PAYMENTS

USING IPMT AND PPMT

1
2 Debt
3 Debt term (years)
4 Interest
5
Year
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

800,000
15
10%

=IPMT($B$4,A7,$B$3,-$B$2)

Interest
Debt principal
payment on
repayment
debt
80,000
25,179
77,482
27,697
74,712
30,467
71,666
33,513
68,314
36,865
64,628
40,551
60,573
44,606
56,112
49,067
51,206
53,973
45,808
59,371
39,871
65,308
33,340
71,839
26,156
79,023
18,254
86,925
9,562
95,617

=PPMT($B$4,A7,$B$3,-$B$2)
Total
payment
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179
105,179

<-- =B7+C7

Are there Multiple IRRs? (No!)

This chart shows the NPV of the leveraged lease cash flows
for various discount rates

100,000

80,000

60,000

NPV

40,000

20,000

Discount rate
0
0%

-20,000

-40,000

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

Pages 226, 228 top

0
1
2
3
4
5
IRR

1
2
3
4
5

8.097% <-- =IRR(B3:B8,0)

Attribution of cash flow

Investment at
Repayment
Cash flow at end of
beginning of
Income
of
year
period
investment
100,000
31,000
8,097
22,903 <-- =C15-D15
77,097
22,000
6,242
15,758
61,339
16,000
4,966
11,034
50,305
22,000
4,073
17,927
32,378
35,000
2,622
32,378

=B16-E16

=$B$10*B15

THE INVESTMENT AT THE BEGINNING OF EACH PERIOD IS THE

PRESENT VALUE (USING IRR AS DISCOUNT RATE) OF ALL FUTURE
CASH FLOWS
Year

24
25
26
27
28
29

CASH FLOW ATTRIBUTION TABLE

Year

23

Cash
flow
-100,000
31,000
22,000
16,000
22,000
35,000

Year

13

14
15
16
17
18
19
20
21
22

UNDERSTANDING THE IRR

1
2
3
4
5
6
7
8
9
10
11
12

1
2
3
4
5

Cash flow at
Investment at
end of year beginning of period
31,000
22,000
16,000
22,000
35,000

100,000 <-- =NPV($B$10,B25:$B$29)

77,097 <-- =NPV($B$10,B26:$B$29)
61,339
50,305
32,378

Page 5

Page 228, bottom

ATTRIBUTION OF LEVERAGED LEASE CASH FLOWS TO

INCOME AND REPAYMENT OF INVESTMENT

1
2 IRR
3
4

12.46% <-- =IRR(C6:C22)

Attribution of cash flow

Year

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

=$B$2*B7

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Investment at
beginning of
period
200,000
174,972
106,994
59,656
27,600
7,212
-14,242
-36,746
-42,510
-29,108
-11,878
9,873
36,945
70,264
110,894
160,062

Cash flow
-200,000
49,941
89,774
60,666
39,487
23,827
22,352
20,730
1,186
-18,697
-20,856
-23,231
-25,843
-28,716
-31,877
-35,354
180,000

Income

24,913
21,796
13,328
7,431
3,438
898
-1,774
-4,577
-5,295
-3,626
-1,480
1,230
4,602
8,753
13,814
19,938

Page 6

Repayment of
investment
25,028 <-- =C7-D7
67,978
47,338
32,056
20,389
21,454
22,504
5,763
-13,401
-17,230
-21,751
-27,073
-33,319
-40,630
-49,168
160,062

Page 230

ECONOMIC VALUE OF THE LEASE CASH FLOWS:

DISCOUNTING THE CASH FLOWS AT THE IRR

1
2 IRR
3

12.46% <-- =IRR(B5:B21)

Year
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Leveraged
lease cash
flows
-200,000
49,941
89,774
60,666
39,487
23,827
22,352
20,730
1,186
-18,697
-20,856
-23,231
-25,843
-28,716
-31,877
-35,354
180,000

Value of lease
cash flows at
beginning of
period

200,000 <-- =NPV($B$2,B6:$B$21)

174,972 <-- =NPV($B$2,B7:$B$21)
106,994 <-- =NPV($B$2,B8:$B$21)
59,656
27,600
Economic Value of Lease Cash Flows at Beginning o
215,000
7,212
-14,242
195,000
-36,746
175,000
-42,510
-29,108
155,000
-11,878
135,000
9,873
36,945
115,000
70,264
110,894
95,000
160,062
75,000
55,000
35,000
15,000
-5,000
-25,000
-45,000

Page 7

Page 230

1
2
3

4
5
6
7
8
9
10
Economic Value of Lease Cash Flows at Beginning of Period
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
286
8
10
12
14
29
30
31
32
33

16

Page 8

UN-4F

1
2 Q
3

MPM METHOD:ATTRIBUTION OF LEVERAGED LEASE CASH

FLOWSTO INCOME AND REPAYMENT OF INVESTMENT
12.00% <-- Possible MPM rate

=IF($B$2*B6>0,$B$2*B6,0)

MPM attribution of cash

flows

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

Investment at Leveraged
beginning of lease cash
period
flows
200,000
49,941
174,059
89,774
105,172
60,666
57,127
39,487
24,495
23,827
3,608
22,352
-18,312
20,730
-39,042
1,186
-40,228
-18,697
-21,531
-20,856
-675
-23,231
22,556
-25,843
51,105
-28,716
85,954
-31,877
128,146
-35,354
178,878
180,000
20,343

Income
24,000
20,887
12,621
6,855
2,939
433
0
0
0
0
0
2,707
6,133
10,314
15,378
21,465

Repayment of
investment
25,941 <-- =C6-D6
68,887
48,045
32,632
20,887
21,919
20,730
1,186
-18,697
-20,856
-23,231
-28,550
-34,849
-42,192
-50,732
158,535

UN-4F

1
2
B$2*B6>0,$B$2*B6,0)
3
4

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

UN-4F

1
2 Q
3

USING SOLVER TO FIND THE MULTIPLE PHASES METHOD (MPM)

RETURN ON A LEVERAGED LEASE
10.91% <-- Possible MPM rate
MPM attribution of cash
flows

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

Investment at Leveraged
beginning of lease cash
period
flows
200,000
49,941
171,881
89,774
100,862
60,666
51,201
39,487
17,301
23,827
-4,638
22,352
-26,990
20,730
-47,721
1,186
-48,906
-18,697
-30,210
-20,856
-9,354
-23,231
13,877
-25,843
41,234
-28,716
74,449
-31,877
114,450
-35,354
162,292
180,000
0

Income
21,822
18,754
11,005
5,587
1,888
0
0
0
0
0
0
1,514
4,499
8,123
12,488
17,708

Repayment of
investment
28,119 <-- =C6-D6
71,019
49,661
33,901
21,939
22,352
20,730
1,186
-18,697
-20,856
-23,231
-27,357
-33,216
-40,001
-47,842
162,292

Page 234

COMPARING THE MPM INCOME WITH THE IRR INCOME

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

IRR
MPM
income
income
24,913
21,822
21,796
18,754
13,328
11,005
7,431
5,587
3,438
1,888
898
0
-1,774
0
-4,577
0
-5,295
0
-3,626
0
-1,480
0
1,230
1,514
4,602
4,499
8,753
8,123
13,814
12,488
19,938
17,708

24,000

Comparing the MPM Income with the IRR

The IRR income is the true economic incom

19,000

14,000
IRR income
MPM income

9,000

4,000

-1,000 1

-6,000

Page 12

Page 234

H THE IRR
1 INCOME
2

3 with the IRR Income

MPM Income

ome is the true4 economic income

5
6
7
8
9
10
11
IRR income
12
MPM income
13
14
15
16
17
18
19
11
20 9
21
22
23
24
25

13

15

Page 13