Capital Lease Discounting

[CFA_aspirant1]

How does the Lessee determine what is the Rate Implicit in a Finance Lease ?
Since the lease is valued initially at the Fair Value (Market price) OR Present Value of Min Lease Payments, the interest rate for the discounting has to be determined. Who determines it for the lessee ?

 

[S2000magician]

You just explained how it’s done:

• PV = fair value
• PMT = minimum lease payment
• n = # of payments
• FV = salvage
• Solve for i

 

[CFA_aspirant1]

But, the moment we say that the PV = Market Price of the Asset, then there is no difference between -
a) Market Value (fair value) and
b) The PV of the lease, discounted at a rate which makes the PV equal to the market value
But we know that, these are not the same (always) and we have to chose either a) or b), whichever is lower.
Hence we are still left with the question as to what is the rate implicit in finance/capital lease from the lessee’s point of view ?