What matters most is translating the language of the contract into accurate mathematical statements so that the lease balance and buyout amounts can be calculated accurately. Most, if not all, of the finance captives compute the adjusted lease balance and constant yield rate as follows…
PV and RATE are Excel functions where RATE is the monthly rate or monthly lease amortization rate. In words, the ALB is the present value of the sum of the remaining base payments (pretax) plus the present value of the residual discounted at the constant yield rate. All you need to do is plug the numbers in the formulas. BTW, payment in the RATE formula is the base (pretax) payment.
Buyout = (ALB + POF) x (1 + sales Tax Rate) + other applicable taxes/admin fees
POF = purchase option fee which is taxable.
EXAMPLE:
Suppose you elect to terminate your lease with 11 payments remaining. First, compute the constant yield rate (CYA) or actuarial) which is the same thing as the lease amortization rate as follows…
Annual CYR = 12 x RATE(24, 1164.03, -65235.00, 59988.75, 1)
= 14.383% YIKES!
Your money factor = .00755… way too high! I’d bail out of this lease unless you’re buying this car out within 30 days or so of lease signing!
At any rate (no pun intended), calculate your ALB as follows…
ALB = PV(0.18383/12, 11, -1164.03, -59988.75, 1)
= 62631.44
Buyout = (62631.44 + 150.00) x (1 + sales tax rate) + applicable fees and other taxes
If you buyout your lease within 30 days of signing, your ALB = 65052.48.
No funny business but the devil is always in the details if you’re not careful. I’ve seen fund providers miscalculate the ALB more than once.