Final answer:
The question pertains to the lower of the interest rate implicit in the lease or the lessee's incremental borrowing rate, which is used as the discount rate to present value the minimum lease payments. The concept of present discounted value is explained with an example of purchasing a bond and facing interest rate risk, influencing the present value of future cash flows.
Step-by-step explanation:
The subject in question is related to the concept of present discounted value (PDV), which is crucial in financial markets and accounting when valuing future cash flows from stocks and bonds. Specifically, the discount rate used to present value the minimum lease payments is the lower of the interest rate implicit in the lease or the lessee's incremental borrowing rate.
In scenarios involving bonds, interest rate risk is evident. For instance, if you purchase a bond with an 8% annual interest rate and the market rate rises to 12%, you incur an opportunity cost by not receiving the higher interest payments. This opportunity cost can be quantified using the concept of present value. To determine the present value of future payments, an appropriate interest rate must be applied. If we assume an interest rate of 25%, a future payment of $125 would have a present discounted value of $100 today. In this way, we can calculate the current worth of future cash flows.