You do pay interest (so to speak) on the depreciated amount with a prepay in how you do the calculation. The reduction in the money factor offsets that you are doing a prepay and allows you to use the money factor in calculating everything.

In other words, you would have been paying 6% interest on the residual without the money factor discount. With the discount, you are paying 4.08% on everything (once again, my discounted money factor was my best guess). The discount basically makes the calculation give you no interest on the depreciation amount.

So in your example, you need to apply the 6% rate to the residual over three years (not one) like it was a loan. The discounted money factor removes the interest from the depreciated amount automatically.

Hope this makes sense, hard to explain. Remember the discounted money factor I used was an estimate, I think it would be slightly lower than that but I'm too lazy to do all the math!