- The access for equipment would entail zero effect on to lease’s amount (Berkovitch & Israel, 1998). So, when a company has not bought an asset, this may venture into the market that makes the identity identical to the asset for a similar amount.
- The permission to buy an asset has a constant amount that would improve the lease amount. So, when the firm makes purchases at the end of the lease in bellowing book value, which would have saved the money that can be used to purchase the fixed and resell when the market would be open, this would be the primary option on equipment. For such reason, there must be a value that is till the expires for the exercise. It is noted that the importance of noting would be made lease contract more capitalized to hire.
- For access to buy the asset at a price, that’s the real option for leases, increasing the value of the lease. Therefore, there would be the value till it has to expires. The contract has the condition to ensure for the lease to be classified to capitalization for leases.
When the equipment undergoes leasing, and the lease contract would be canceled for any date, which is a negative outflow, there would be a decrease in the security with a received deposit (Berkovitch & Israel, 1998). This would increase NPV for lease and amount of increase to lease when the lease’s cancellation upon the equipment there would have to make the purchase that is high at the time.
When the equipment is purchased at market value, there has to be a damaging outflow of cash equal to the last year’s purchase price. The negative amount would so decrease to NPV of the lease when the equipment is bought at the outflow negotiation at year four which is equal to purchase for equipment.
Berkovitch, E., & Israel, R. (1998). Why the NPV Criterion Does not Maximize NPV. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.138643