How it works
The cash flow is the list of money in and out by year. Write that list first.
- Ask what else the firm could do with the cash. That is one way people pick a rate.
- Some teams use a cost of capital. Some use a simple hurdle they already use for projects.
- Do not invent a precise rate from thin air and then treat it as fact.
- Run the same leases at two or three nearby rates and show if the rank holds.
Formula in words. Later cash today = later cash / (1 + discount rate) to the power of the year.
| Input | Meaning |
|---|---|
| Candidate rate | The main rate you will show |
| Low test | A nearby lower rate |
| High test | A nearby higher rate |
| Lease cash | The same occupancy cash in every test |
Worked example
Here is a teaching sample. It is not customer data and not a result from a live client.
Lease A start rent$38,000
Lease B start rent$35,340
Discount rate8%
Sample NPV A$371,164
| Metric | Lease A | Lease B |
|---|---|---|
| Start rent | $38,000 | $35,340 |
| Year-1 extras | $10,000 | $10,700 |
| Year-1 credit | $8,000 | $4,400 |
| Sample NPV | $371,164 | $358,569 |
| Year | Rent | Extras | Credit | Cash out | Value today |
|---|---|---|---|---|---|
| Year 1 | $38,000 | $10,000 | $8,000 | $40,000 | $37,037 |
| Year 2 | $39,900 | $10,300 | $0 | $50,200 | $43,038 |
| Year 3 | $41,895 | $10,609 | $0 | $52,504 | $41,679 |
| Year 4 | $43,990 | $10,927 | $0 | $54,917 | $40,366 |
| Year 5 | $46,189 | $11,255 | $0 | $57,444 | $39,095 |
| Year 6 | $47,575 | $11,593 | $0 | $59,168 | $37,286 |
| Year 7 | $49,002 | $11,941 | $0 | $60,943 | $35,560 |
| Year 8 | $50,472 | $12,299 | $0 | $62,771 | $33,913 |
| Year 9 | $51,986 | $12,668 | $0 | $64,654 | $32,343 |
| Year 10 | $53,546 | $13,048 | $0 | $66,594 | $30,846 |
| Sample NPV | — | — | — | — | $371,164 |
How to read the sample
Sample NPV for the rate-test lease is about $371,164. A second path lands near $358,569. That gap is a talking point, not a promise.
A small credit lands early. If one path wins only because a credit sat in the wrong year, start over.
Year notes for the rate-test lease
- Year 1 of the rate-test lease has rent of $38,000.
- Shared building cost is $10,000.
- A credit of $8,000 lowers the cash you pay that year.
- Cash out this year is about $40,000. A small credit lands early.
- Later cash gets a shrink for time. At 8 percent, year 1 is worth about $37,037 today.
- Next, year 2 rent is $39,900.
- CAM, which is a shared building cost, is $10,300.
- There is no credit in this year.
- You pay about $50,200 this year after extras and credits. The step-up is the point of this sample.
- Time shrinks later cash. At 8 percent, year 2 is worth about $43,038 today.
- Then year 3 rent is $41,895.
- Extras for the building come to $10,609.
- Credits skip this year.
- The net cash this year is about $52,504. Later years get heavier if the rate is low.
- Waiting has a price. At 8 percent, year 3 is worth about $41,679 today.
- After that, year 4 rent is $43,990.
- The shared building cost this time is $10,927.
- No extra credit shows up this year.
- Cash out this year is about $54,917. A high rate shrinks these years hard.
- Later cash gets a shrink for time. At 8 percent, year 4 is worth about $40,366 today.
- In year 5 of the rate-test lease, rent is $46,189.
- Shared building cost is $11,255.
- There is no credit in this year.
- You pay about $57,444 this year after extras and credits. The last year is where rate fights show up.
- Time shrinks later cash. At 8 percent, year 5 is worth about $39,095 today.
- Year 6 of the rate-test lease has rent of $47,575.
- CAM, which is a shared building cost, is $11,593.
- Credits skip this year.
- The net cash this year is about $59,168. Keep this later year in the sum for the sample.
- Waiting has a price. At 8 percent, year 6 is worth about $37,286 today.
- Next, year 7 rent is $49,002.
- Extras for the building come to $11,941.
- No extra credit shows up this year.
- Cash out this year is about $60,943. The row still belongs in the sum for the long path.
- Later cash gets a shrink for time. At 8 percent, year 7 is worth about $35,560 today.
- Then year 8 rent is $50,472.
- The shared building cost this time is $12,299.
- There is no credit in this year.
- You pay about $62,771 this year after extras and credits. Keep this later year in the sum for the long path.
- Time shrinks later cash. At 8 percent, year 8 is worth about $33,913 today.
- After that, year 9 rent is $51,986.
- Shared building cost is $12,668.
- Credits skip this year.
- The net cash this year is about $64,654. The row still belongs in the sum for the long path.
- Waiting has a price. At 8 percent, year 9 is worth about $32,343 today.
- In year 10 of the rate-test lease, rent is $53,546.
- CAM, which is a shared building cost, is $13,048.
- No extra credit shows up this year.
- Cash out this year is about $66,594. Keep this later year in the sum for the long path.
- Later cash gets a shrink for time. At 8 percent, year 10 is worth about $30,846 today.
Add those year values. The sample NPV for the rate-test lease is about $371,164. This is a teaching sample, not a client result.
Trusted sources
These are public references. They are not endorsements and not client results.