Question

Benning Manufacturing Company is negotiating with a customer for the lease of a large machine manufactured by Benning. The machine has a cash price of $750,000. Benning wants to be reimbursed for financing the machine at a 12% annual interest rate over the five-year lease term. (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.)

Required:
1. Determine the required lease payment if the lease agreement calls for 10 equal semiannual payments beginning six months from the date of the agreement.
2. Determine the required lease payment if the lease agreement calls for 20 equal quarterly payments beginning immediately.
3. Determine the required lease payment if the lease agreement calls for 60 equal monthly payments beginning one month from the date of the agreement. The present value of an ordinary annuity factor for n = 60 and i = 1% is 44.9550.
Requirement 1:

Calculation Function

Present Value

N=

i=

Annual Installment

Requirement 2:

Calcualtion function

Presemt Value

N=

i=

Annual Installment

Requirement 3:

Calculation Function

Present Value

N=

i=

AnnualInstallment

Answer 1

Answer 1.

Price of Machine = $750,000
Annual Interest Rate = 12%
Semi-annual Interest Rate = 6%
Number of lease payments = 10

PV = 750,000
N = 10
i = 6%

Semi-annual Payment = $750,000 / PVA of $1 (6%, 10)
Semi-annual Payment = $750,000 / 7.3601
Semi-annual Payment = $101,900.79

Answer 2.

Price of Machine = $750,000
Annual Interest Rate = 12%
Quarterly Interest Rate = 3%
Number of lease payments = 20

PV = 750,000
N = 20
i = 3%

Quarterly Payment = $750,000 / PVAD of $1 (3%, 20)
Quarterly Payment = $750,000 / 15.3238
Quarterly Payment = $48,943.47

Answer 3.

Price of Machine = $750,000
Annual Interest Rate = 12%
Monthly Interest Rate = 1%
Number of lease payments = 60

PV = 750,000
N = 60
i = 1%

Monthly Payment = $750,000 / PVA of $1 (1%, 60)
Monthly Payment = $750,000 / 44.9550
Monthly Payment = $16,683.35