Finance lessors do not generally approach the analysis from
the ‘present value’ direction. Generally, lessors will
want to make a specified margin on their funds. For example, a
lessor may decide that it wants to make an interest turn of 2% on
the capital invested in its finance leases. So it feeds 2% into the
computer program, together with other knowns - the cost of the
asset (the 'loan'), the cost of money, its likely expenses, the tax
rates, the capital allowances rates, the rental payment dates etc -
and out comes the rentals the lessor needs to charge to make a 2%
turn. Although the starting point is different, the mathematics in
the program relies on the time-value-of-money concepts previously
outlined.
In practice lessors may depart from their theoretical target
return or their target return may vary from sector to sector. They
may charge more if the risk of default is greater or if the market
will bear it. They may charge less if competition is fierce and
they are trying to gain market share of if the lessee has a very
high credit rating. Small ticket lessees are generally charged more
than big ticket lessees (with small ticket lessees being charged a
margin of several percent and big ticket lessees sometimes being
charged a margin of 20 basis points (0.2%), or even less.
Lessors can also design rental profiles to suit the lessee.
For example, often lessees want to match the profits from a new
asset with the rental payments. So they want low or nil rentals
when a major asset is being built (possibly over several years) and
while production builds up. As the lessee's profits begin to
increase as the asset comes on stream the lessee can increasingly
afford larger rentals. So they want a rental profile that rises
over time (a 'stepped' rental profile).
