James also informs Nick that the lease contract can include a cancellation option.

Here is a tip:
The NAL is the amount saved by a company when taking any fixed asset on lease rather than buying that asset.

Explanation
Yes, the inclusion of the cancellation option will affect the value of the lease. If the cancellation option is included, the periodic lease rent will be more and the present value of operating cash outflows would also be more. This will reduce the NAL and it will be a more costly option for the lessee.

The lessee will only exercise such an option, when it is beneficial to do so. The lessee would exercise the option to cancel the lease only when the future economic or technological conditions make the value of the asset less than the value of the future lease payments.

Verified Answer
The inclusion of the cancellation option in the lease will result in an increase in the annual lease payments.