when a company cannot afford to fully purchase equipment or expects it to have a short useful life it may opt to lease the equipment the lessor owns the equipment and rents it out the lessee makes regularly scheduled payments to the lessor for the use of the equipment the lessee is expected to make a minimum payment during the contractual period that the equipment is leased out the minimum payment is known as the minimum lease payment 
minimum lease payments are rental payments over the lease term including the amount of any bargain purchase option premium and any guaranteed residual value and excluding any rental relating to costs to be met by the lessor and any contingent rentals special considerationsalthough common sense suggests that the minimum lease payments on a 12 month lease at 1 000 a month should be 12 000 this number can be complicated by contractual clauses executory costs like maintenance and insurance are usually excluded because they are the responsibility of the lessor but other factors can be added to the cost of a lease these include any guarantees made by the lessee to the lessor about the residual value of the leased property at the end of the lease as well as any payments for non renewal of the lease once these are factored in a reasonable present value can be assigned to the lease for accounting purposes example of minimum lease payments and present valuethe value of a lease is estimated by discounting the minimum lease payments let s use an example to determine how much a lease will cost in today s dollars a company takes out a 3 year lease on a number of heavy duty trucks the minimum lease payment per month is 3 000 per month or 36 000 per year lessors also charge interest as compensation for leasing their equipment in this case the interest rate is 5 per year or 5 divided by12 months 0 417 per month to calculate the present value pv of the leased trucks the residual value must be factored in the residual value is the value of the trucks after the lease period is over let s assume in this case that the residual value is 45 000 the annual interest rate on the lease is used as the discount rate in calculating the pv the pv on the trucks lease can be calculated using the pv formula and including the residual in the calculation as follows p v 36 000 1 0 5 1 36 000 1 0 5 2 36 000 1 0 5 3 45 000 1 0 5 3 34 285 71 32 653 06 31 098 83 38 873 53 136 911 13 begin aligned pv frac text 36 000 1 05 1 frac text 36 000 1 05 2 frac text 36 000 1 05 3 frac text 45 000 1 05 3 text 34 285 71 text 32 653 06 text 31 098 83 text 38 873 53 text 136 911 13 end aligned pv 1 051 36 000 1 052 36 000 1 053 36 000 1 053 45 000 34 285 71 32 653 06 31 098 83 38 873 53 136 911 13 in today s value the lease will be estimated to cost 136 911 13 