American Eagle Outfitters includes the following in its fiscal 2016 annual report (in thousands):
Required:
a. Calculate the present value of operating lease payments using a discount rate of 6% and rounding the remaining lease life to the nearest whole year.
b. Assume that the leased equipment has a useful life of 9 years, no salvage value, and straight-line depreciation is used. Estimate the effect on net operating profit before tax of capitalizing these leases. Assume that rental expense in 2016 is the same as 2017 lease payments.
c. How would ROE and the other financial ratios from the ROE decomposition be affected if the company capitalized these operating leases?

Question

American Eagle Outfitters includes the following in its fiscal 2016 annual report (in thousands):
  Required:
a. Calculate the present value of operating lease payments using a discount rate of 6% and rounding the remaining lease life to the nearest whole year.
b. Assume that the leased equipment has a useful life of 9 years, no salvage value, and straight-line depreciation is used. Estimate the effect on net operating profit before tax of capitalizing these leases. Assume that rental expense in 2016 is the same as 2017 lease payments.
c. How would ROE and the other financial ratios from the ROE decomposition be affected if the company capitalized these operating leases?

Quizplus · Accepted Answer

The Answer of American Eagle Outfitters includes the following in its fiscal 2016 annual report (in thousands):
  Required:
a. Calculate the present value of operating lease payments using a discount rate of 6% and rounding the remaining lease life to the nearest whole year.
b. Assume that the leased equipment has a useful life of 9 years, no salvage value, and straight-line depreciation is used. Estimate the effect on net operating profit before tax of capitalizing these leases. Assume that rental expense in 2016 is the same as 2017 lease payments.
c. How would ROE and the other financial ratios from the ROE decomposition be affected if the company capitalized these operating leases?

American Eagle Outfitters Includes the Following in Its Fiscal 2016