As a lessor (owner of asset), you have two objectives in arriving at IRR (interest rate) for lease: to be competitive and ensure adequate return to cover all cost and satisfy shareholders.
To be competitive, you must always keep abreast of market rates and then attempt to stay within that range.
There are two approaches to ensuring adequate return. The first which is commonly used is to take the average cost of debt, add the needed spread to stay competitive and hope the spread will cover all cost and return to the shareholders. A finer tuned approach is to add the cost of doing business to the average cost of debt plus the spread.
The second and more sophisticated approach is to compute the Weighted Average Cost of Capital (WACC), which is the cost of debt and equity. WACC provides management with a pricing floor. It is sufficient to pay the lender and meet the return to the shareholders. The cost of doing business and other associated transactional cost must be added at arriving at the final IRR.
However, it must be noted that all leases are not priced at the same rate. Generally, the smaller the transaction size the higher the rate, adjustment being made based on the lessee’s credit assessment.
A successful lessor will continually seek innovative ways to enhance his business. Unlock the secrets, learn from the experts. 08023176691, 08023179048, info@elannigeria.org, elan_nigeria@yahoo.com