Question

Question 2 - Week 5 Fitbit Ltd has leased a machine on the following terms: Date of entering lease 1 July 2019 Duration of lease 5 years Life of asset 6 years Unguaranteed residual value $40,000 Lease payments inception (at the start) $60,000 Annual payments (5) $65,000 Implied rate 11.0 % Required: Determine the Fair Value (rounded off) of the leased asset.

Answer 1

Fair Value (rounded off) of the leased asset = $285,397

Fair Value of the leased asset = PV of the cash Flows

= PV of Cash Flow for year 0+ PV of Cash Flow for year 1+ PV of Cash Flow for year 2+ PV of Cash Flow for year 3

+ PV of Cash Flow for year 4+ PV of Cash Flow for year 5

= 60000+ 65000 * 1 / (1 + 11%) ^ 1+ 65000 * 1 / (1 + 11%) ^ 2+ 65000 * 1 / (1 + 11%) ^ 3+ 65000 * 1 / (1 + 11%) ^ 4+ 40000 * 1 / (1 + 11%) ^ 5

= 60000 + 58558.56 + 52755.46 + 47527.44 + 42817.51 + 23738.05

= $285,397