Question

jjanuary first, X enters noncancelable 10 year lease for cooking equipment . fair value 100 million...

jjanuary first, X enters noncancelable 10 year lease for cooking equipment . fair value 100 million

requires annual year end lease payments. if the implicit interest rate on the lease is 6% what is the annual lease payment? - where does this value come from? can you explain it step by step please like I"m 6 years old .

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Answer #1

Fair value of the cooking equipment is $100 million so this is the present value of the annual lease payments made over the lease term of 10 years.

Now, all that is required to be done is divide $100 million by the present value interest factor of an ordinary annuity of $1 per period at 6% for 10 periods.

Present value factor of an ordinary annuity of $1 per period at 6% for 10 periods, PVAIF (6%, 10) = 7.3601 (can be found in the present value tables)

Therefore,

Annual lease payment = $100,000,000 / 7.3601 = $13,586,772

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