How to use Excel to Calculate the Present Value of Minimum Lease Payments when the payment amount changes each period

This post by George Azih explains how to use excel to calculate the present value of minimum lease payments when each payment is different.

Example:

Let’s calculate the present value of the minimum lease payments for a lease with a lease term of 24 months. The lease payment starts at 5,000/month, and increases by 1,000 every 6 months. Payments are made at the beginning of the month. The Lessee’s borrowing rate is 6%.

The following embedded excel file shows you how to do this easily. (You can actually see my formulas):

From the file above (scroll down in the embedded file), you can see that the present value is  $146,543.92.

Here is a manual explanation:  Perform the following steps:

1)      Create a table with three Headers, namely, “Period”, “Payment” and “Present Value” as follows:

Period

Payment

Present Value

 

2)      In each row under “Period” put in the number of Periods. Start with “1” if payments are made at the end of the month, and end at the actual number of periods. If payments are made at the beginning of the month, start with “0”, and end at the actual number of periods minus 1. As a result, our Table now looks like this:

 

Period

Payment

Present Value

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Total Present Value

 

Note that in this example, because the payments are made at the beginning of the month, the “Period” column begins with 0 and ends with 23. If payments were made at the end of the month, it would have begun with 1 and ended with 24.

 

3)      In each row under “Payment,” put the payment for that month. Remember that our payment starts at $5,000/month, and every 6 months the monthly payment increases by $1,000. So our table now looks like this:

 

Period

Payment

Present Value

0

5,000

1

5,000

2

5,000

3

5,000

4

5,000

5

5,000

6

6,000

7

6,000

8

6,000

9

6,000

10

6,000

11

6,000

12

7,000

13

7,000

14

7,000

15

7,000

16

7,000

17

7,000

18

8,000

19

8,000

20

8,000

21

8,000

22

8,000

23

8,000

Total Present Value

 

To get the values for “Present Value,” we have to use the PV function in excel. We will put the formula in for the first cell (period 0), then drag the formula down. Go to the first cell under “Present Value” and click the function button.  Choose “PV,” (It should be under financial):

When you click “OK, you should see the following:

Enter the following:

Rate = 6%/12 = 0.5% = 0.005 (in excel, you can either enter 0.5% or 0.005 without the percentage sign)

Nper = (Select the corresponding “Period cell” for that Present Value. So if your first “Present Value” cell is “C2,” then  Nper should be “A2”)

Pmt = 0

FV = (Select the negative of the corresponding  “Payment cell”  for that Present Value. So if your first “Present Value” cell is “C2,” then Fv should be “-B2”)

Type = 0

Your screen should look like this:

Using this information, excel should give us a value of $5,000 for the first “Present Value”.

Now copy the formula down for the rest of the “Present Values,” and for the “Total Present Value,” add all the values in the “Present Values” column. Your table should now look like this:

Period

Payment

Present Value

0

5,000

5,000.00

1

5,000

4,975.12

2

5,000

4,950.37

3

5,000

4,925.74

4

5,000

4,901.24

5

5,000

4,876.85

6

6,000

5,823.11

7

6,000

5,794.14

8

6,000

5,765.31

9

6,000

5,736.63

10

6,000

5,708.09

11

6,000

5,679.69

12

7,000

6,593.34

13

7,000

6,560.53

14

7,000

6,527.90

15

7,000

6,495.42

16

7,000

6,463.10

17

7,000

6,430.95

18

8,000

7,313.09

19

8,000

7,276.71

20

8,000

7,240.50

21

8,000

7,204.48

22

8,000

7,168.64

23

8,000

7,132.97

Total Present Value

146,543.92

 From the table, we can see that the total present value of the minimum lease payments is 146,543.92.

This entry was posted in Lease Accounting, Minimum Lease Payments Using Excel, Present Value of Lease Payments with varying lease payments, Present Value of Minimum Lease Payments and tagged . Bookmark the permalink.

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