What is most directly used in determining present value in lease pricing?

• A. The asset's color.
• B. The expected resale value of the asset at end of term.
• C. The credit rating of the lessee.
• D. The timing and amount of lease payments.

Answer: (D)

Present value in lease pricing is determined by the stream of cash flows the lessor expects to receive, brought back to today using an appropriate discount rate. The exact PV hinges on when payments occur (timing) and how large they are (amounts). Those lease payments are the actual cash flows used in the PV calculation, typically summed as each payment divided by (1 + rate) raised to the payment’s time period.

Other factors don’t drive the PV as directly. The asset’s color has no financial impact. The expected resale value (residual) can influence total value when you consider the full lease investment, but the present value of the payment stream itself comes from the payments. The lessee’s credit rating can affect the discount rate used (risk/pricing), but the fundamental PV calculation is still driven by the timing and amount of the payments.