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CASH LEASE OF FARM LAND, BUILDINGS AND EQUIPMENT THIS LEASE is entered into this day of , 20 , Between , landlord, of (Address) and , tenant, of (Address) 1. The landlord hereby leases to the tenant,
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Hi everyone we've had a few questions online about how to calculate the present value of the LEAs lecture demonstration because there's something I didn't do in class instead of trying to write the entire response what I thought I'd do is just to show you how I actually calculated it so the first thing that we need is the cash flows in the question because like in any present value situation we need to see what the cash flows are and when they actually happen so in the question that we had there were the regular cash flows of 16 million dollars sorry I should say sixteen million one hundred eight thousand two hundred thirty-six dollars per year in arrears for five years it's a bit of a mouthful that number but as you'll see there's a reason why we ended up selecting that as the number in addition there was a 50 million dollar guaranteed residual what I like to do then is to draw up a time line so we draw it all the way through make sure we get the right number of years and we have the five years set up now I'm just going to show the minions so we have sixteen million dollars sixteen million dollars six nine million dollars another sixteen million dollars and then 66 now the reason we do all of this is because of the information that the question has provided us so the sixteen million dollars starts at the end of the first year because the payments are in arrears we incorporate fifty million dollars in the final payment because the fifty million dollars is guaranteed and by guarantee that means that the lessee has to make good at least fifty million dollars at the end of the lease whether this is returning the asset whether this is paying any cash it is guaranteed that they are going to be paying fifty million dollars at that point in time if the residual is unguaranteed then the lessee doesn't have to pay that and you would not include that amount as a cash flow now from this point all we need to do is to discount these rates so these amounts using the discount rate provided so that we have a present value sitting here now the rate that we've been given in the question is 7.5 percent which in a way is an annoying rate because we can't use the present value tables because they only have full percentage discount rates so that leaves us out of the formula method or as I'll show you in a second we can use an Excel spreadsheet to work this out using the formula method we take the cash flow and we divide that cash flow by one plus the discount rate all ^ what period it's after the first year it's to one we then repeat that for the remaining years and what you should end up with is five calculations you work them all out add them all up and you should get pretty much spot on 1 million dollars or should I say one hundred million dollars if you're out by a couple of decimal places either way there's just been some rounding and it's not not a problem the problem with this though is in an exam or just simply sitting down working it out can be quite...