Finding the debt equivalent of operating lease

Assignment Help Accounting Basics

Reference no: EM1312481

Leases (in part)

American leases various types of equipment and property, primarily aircraft and airport facilities. The future minimum lease payments required under capital leases, together with the present value of such payments, and future minimum lease payments required under operating leases that have initial or remaining non-cancelable leases terms in excess of one year as of December 31, 2004, were (in millions):

Year ending December 31,	Capital leases	Operating leases
2005	$211	$1,066
2006	233	999
2007	187	982
2008	225	931
2009	174	838
2010 and subsequent	950	7,525
	1,980	$12,341

Less amount representing interest 815
Present value of net minimum lease payments $ 1,165

American's capital lease liability is reported among other debt on the balance sheet. The company's debt totaled $25,567 million. Some analysts might consider operating lease commitments as equivalent to debt when assessing financial risk. If American's operating leases were considered capital leases, lease payments would be capitalized at the present value of all future payments.

Required:
If the interest rate used by American to discount rental payments on capital leases is 12% and rentals after 2009 are payable approximately evenly over the following 9 years (approximated as $7,525/$838), what is the debt equivalent of the operating lease commitments?

Reference no: EM1312481

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