Question

Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate.

	Situation
		1			2
Lease term		10	yrs		20	yrs
Lessor's desired rate of return		12	%		14	%
Lessee's incremental borrowing rate		14	%		12	%
Fair value of asset	$	710,000		$	510,000

For convenience, here are some table values:

Periods; int. rate	PV, ordinary annuity		PV, annuity due
10 periods, 12%	5.6502		6.3282
10 periods, 14%	5.2161		5.9464
20 periods, 12%	7.4694		8.3658
20 periods, 14%	6.6231		7.5504

Required:
For each situation determine the amount of the annual lease payment, as calculated by the lessor. (Round your final answers to the nearest whole dollar.)

Answer 1

	Situation 1	Situation 2
Lease Term	10	20	Years
Lessor's desired rate of return	12%	14%
Fair Value=(A)	710000	510000
P.V of annuity due 10 years at 12% in situation 1 and 20 years at 14% in situation 2=(B)	6.3282	7.5504
Annual lease payment=(A)/(B)	$                     1,12,196.20	$                    67,546.09
Annual lease payment (nearest whole dollar)	112200	67550