Question

On January 1, James Industries leased equipment to a customer for a five-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $860,000 and has an expected useful life of seven years. Its normal sales price is $860,000. The residual value after five years is $200,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 6%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Calculate the amount of the annual lease payments.

Guaranteed Residual Value
Table or calculator function:
n =
i =
	Present value
Amount to be recovered (fair value)
Guaranteed residual value
Amount to be recovered through periodic lease payments
Lease Payment
Table or calculator function:
n =
i =
	Lease Payments
Amount of fair value recovered each lease payment

Answer 1

Guaranteed Residual Value
Table or calculator function:	PV of $1
n =	7
i =	6%
	Present value
Amount to be recovered (fair value)	860000
Guaranteed residual value	149452	(200000*0.74726)
Amount to be recovered through periodic lease payments	710548
Lease Payment
Table or calculator function:	PVA of $1
n =	5
i =	6%
	Lease Payments
Amount of fair value recovered each lease payment	168682	(710548/4.21236)