Financial leases allow businesses to acquire assets through financing agreements, similar to loans. According to accounting standards, financial leases should be capitalized and depreciated to reflect the substance of the agreement. simplifies the process of evaluating business cases for financial leases by automating calculations and eliminating the need for separate spreadsheets. This document explains how to evaluate a business case for a financial lease within Stratex.
Key Concepts
Stratex simplifies the creation and analysis of financial leases within business cases. Here's a breakdown of the key concepts involved:
Financial Leases: A financing method for acquiring assets through lease agreements.
Stratex for Leases: Enables building lease models within business cases, automating calculations for lease scenarios. The periodic lease payments are reflected as an effective capital cost with depreciation and interest components for consistency with direct capital purchases.
Lease Details:
Activity Type “Lease”: Select the type "Lease" within an activity to activate lease-specific calculations.
Specify Lease Parameters: Monthly payment amount, nominal interest rate, residual value at lease end, and lease term (months).
Automatic Calculations: Stratex automatically calculates these financial metrics based on your input:
Net Present Value (NPV): Present value of all lease payments, considering the time value of money.
After-tax Cost (NPVAT): Total lease cost after factoring in taxes.
Depreciation: Reflects the capitalized lease cost, spreading depreciation expense over the lease term.
Effective Interest Rate: Calculates the effective interest rate on the lease.
For more information on how financial metrics are calculated, see the documentation Interpret Financial Metrics.
Instructions
Start a Business Case: Initiate the standard business case submission process.
Financial Analysis:
Navigate: Within the business case, go to Financial Analysis.
Investment Component: Enter the leased asset's description (e.g., "New Forklift") and assign an appropriate depreciation class (e.g., "Vehicles").
CAPEX Outflow Activity: Add an activity representing the lease expense. Define the lease details and enter the following information to trigger the calculations for the financial analysis:
Click the "Lease" option within this activity to indicate a lease scenario.
Enter the number of assets being leased (e.g., quantity of 1 forklift).
In the "Unit Value" field, enter the monthly lease payment amount.
Define the nominal interest rate associated with the lease agreement.
Specify the residual payment value at the end of the lease term.
Set the lease duration as the Activity Duration in months.
Click "Update" to save these details.
Automatic Calculations: Stratex automatically performs calculations based on your input:
Investment Capex: This is the sum of the capital lease repayments excluding interest. This is the basis for depreciation and interest calculation.
Net Present Value (NPV): this is calculated based on actual monthly cash flows (before tax) discounted by the monthly cost of capital rate (annual rate divided by twelve).
After-tax Cost (NPVAT): this is calculated net of the tax shield which is discounted at the cost of capital rate for the company. Tax savings are calculated on the monthly depreciation and interest charge.
Depreciation (see Depreciation tab): this is based on the lease Investment Capex and the depreciation class of the investment.
Interest (see Interest tab): this calculated at the the specified interest rate (compounded monthly) on the outstanding lease liability monthly.
Saving and Reusing Templates (Optional):
To streamline future lease analyses, consider creating a template:
a. Create a new financial analysis with a sample lease scenario.
b. Utilize Stratex parameter functionality. Replace fixed values with parameters for:
Monthly Repayment
Residual Payment
Interest Rate
Lease Term
c. Save this template for future use. When needed, simply adjust the parameter values for a new lease scenario, and Stratex will automatically recalculate the NPV, NPVAT, and other relevant metrics.