Module 10 Solutions

M10-11.

a. The present value of Costcos operating lease payments (using Excel, a financial calculator,
or tables) is:

Year ($ millions)

Operating Lease
Payment

Discount Factor
(i=0.06)

Present
Value

1 ...............................

$189

0.94340

$178

2 ...............................

175

0.89000

156

3 ...............................

167

0.83962

140

4 ...............................

160

0.79209

127

5 ...............................

153

0.74726

114

>5 .............................

1,753

7.88687*

902**

11.46 years, rounded to 11 years***

Remaining life ..........
*

Present value of annuity factor for 11 years @ 6%

**

$153 7.88687 0.74726 = $902

$1,617

*** $1,753 $153 per year = 11.46 years

b. Costcos liabilities are 8.4% higher following this adjustment (adjusted liabilities are $19,271
million + $1,617 million = $20,888 million compared with $19,271 million). Its adjusted assets
would also increase by the $1,617 million, or 5.3% ($30,283 + $1,617) / $30,283 = $31,900 /
$30,283 = 1.0534).

Further, to adjust the income statement, we would replace rent expense of $189 million with
depreciation expense of $101 million [$1,617 million / 16 years] (an operating item) and
interest expense of $97 million [$1,617 million 0.06] on the lease liability (a nonoperating
item).