»Ê¹ÚÌåÓýapp

Guidance on the meaning of net present value is at BLM11210.

Assume market interest rates are 10% a year payable annually in arrear. This means a sumof £1000 today will be worth £1100 in a year’s time. So, ignoring questions of credit risk and profit margin etc, you should be able to sell your entitlement to a sum of £1100in a year’s time for £1000 today. Put another way, the ‘present value� of that future entitlement to £1100 is £1000. Similarly, the present value of an entitlement to £1210in two years is also £1000 (because £1000 compounded at 10% is £1210).

»Ê¹ÚÌåÓýapp intervals at which compounding of interest occurs can have a significant effect. Interest at 10% calculated at monthly rests is worth more than interest at 10% calculated at annual rests. Interest is earned on interest earlier in the monthly case.

»Ê¹ÚÌåÓýappse simple examples of the ‘time-value-of-moneyâ€� illustrate the principles which lie at the heart of leasing calculations. »Ê¹ÚÌåÓýapp lessor’s upfront tax losses save tax (or generate repayments) in the early part of the lease. In due course the lessor will have to pay taxon their profit. »Ê¹ÚÌåÓýapp tax on later rentals receivable should be more than the tax saved upfront (because earnings exceed expenses overall). But the upfront tax saved can be worth more (have a greater present value) than the larger amount of tax the lessor eventually has to pay on the profits in the future.