Financial Lease Evaluation Under Conditions of Uncertainty.

Abstract This article discusses a method for financial lease evaluation under conditions of uncertainty in accounting. A financial lease is a contractual arrangement committing the leasee to pay the lessor a series of payments and sometimes give up values the total of which exceeds the purchase price of the leased asset. Usually the payments are spread over the useful life of the asset and during this period the contract is not cancelable by either party. While there may be some confusion in the financial community over whether leases are the same as other debt financing instruments or not, it is clear that for economic analysis the financial lease has the same cash flow characteristics as long term debt financing. There are two methods for evaluating financial leases, as an after-tax interest cost equivalent, or as an after-tax present value cost. The first step in calculating the after-tax interest cost equivalent for leasing is to define the relevant cash flows. Comparing a financial lease to the purchase of an asset, the lessee saves the cost of the asset and disburses the annual lease payments.