How to Calculate Net Present Value of Lease Payments is a crucial financial evaluation technique. It helps determine the present value of future lease payments, considering the time value of money. For example, a company considering leasing a new equipment worth $100,000 for five years, with annual payments of $25,000, would use Net Present Value (NPV) to assess the viability of the lease.
NPV is highly relevant as it aids in informed decision-making, evaluates the true cost of leasing, and allows for comparisons between different lease options or financing alternatives. Historically, the concept of Net Present Value traces back to Irving Fisher’s “The Theory of Interest” (1930), which emphasized the time value of money.