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Capitalizing Operating Leases

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Capitalizing Operating Leases
McDonald's Corp. was the lessee at 14,139 restaurant locations through ground leases at December 31, 2011. The lease terms are generally for 20 years.

The company is also the lessee under noncancelable leases covering certain offices and vehicles. The company's footnotes also revealed that at year-end 2011, the minimum lease commitments under noncancelable operating leases were:

In millions Restaurant Other Total
2012 $1,172.6 $74.4 $1,247.0
2013 1,104.8 62.8 1,167.6
2014 1,019.50 55.4 1,074.9
2015 921.9 43.1 965.0
2016 813.9 37.9 851.8
Thereafter 6,039.1 208.8 6,247.9
Total minimum payments $11,071.8 $482.4 $11,554.2

1. Calculate the present value of the company's operating leases assuming an interest rate of 6%.

Hint - Assume any "thereafter" amount is straight-lined over the remaining lease period using the 5th year (2016) lease payment, with the final year amount as a plug figure to reconcile to the total future minimum lease payments. Use Excel or a financial calculator for your computations. Do not round until your final answer. Round your answer to the nearest million dollars.

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Solution Summary

This solution illustrates how to compute the capitalized value of operating lease payments using the company's footnote disclosures and an assumed discount rate.