A Practical Derived Lease Rate Algorithm

Underlying the widely used multiple-investment-sinking fund (MISF) method for lease evaluation is the determination of a derived lease rate which is a specific rate that provides the lessor with the required yield on equity. To compute this derived lease rate, trial-and-error techniques are traditionally used. In addition to being based on trial-and-error, the employment of these techniques requires a specification of the precise time structure of the various types of cash flows involved, and this can be somewhat technically cumbersome. To overcome these shortcomings, this study presents a mathematical derivation of a formal expression for the derived lease rate. Due to the widespread use of the MISF method, it seems that the formal expression developed here can be very useful for decision makers (at both the corporate as well as the individual-investor levels) in determining the derived lease rate in practice. Another desirable property of the model is that it can be easily employed for the purpose of studying the effects of changes in the various parameters involved on the derived lease rate.