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Finally, the net residual value in month 66 represents the lease contract residual value, reduced by the return of the lease security deposit [$12,500 - $499 = 12,001].
In general, the lower the vehicle residual value, the lower the value of K necessary to equate the future value of cash inflows derived from leasing with the net residual value ([R.sub.n]), and the more attractive the lease option.
The net residual value ([R.sub.n]) of $4,659 shown in Table 1 is equal to the vehicle's $4,884 residual value, less the return of the $225 security deposit.
The effective annual lease hurdle rate (K) necessary to transform the net cash inflows attributable to lease financing into the net residual value ([R.sub.n]) at the maturity of the lease is 11.75 percent.