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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: net present value and calculating rents: cash flows

Where there are a series of receipts and payments over time the lessor needs to work outthe net present value of all of them. The net present value calculation will take account of all the cash flows, and not just the tax - the initial cost of the kit (which may be paid out at different dates on big ticket deals), the rental flows, the cost of financing the asset, other expenses and so on. This analysis is usually called a discounted cash flow (DCF) computation. The lessor discounts the future cash flows at an appropriate interest rate to find their net present value. The finance lessor will come out in front if the sum of the net present value of the cash coming in is greater than the sum of the net present value of the cash going out. Or, putting it another way, there is positive net present value overall.