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Tamarisk Inc. wishes to lease machinery to Thiensville Company. Thiensville wants the machinery for 4 years,...

Tamarisk Inc. wishes to lease machinery to Thiensville Company. Thiensville wants the machinery for 4 years, although it has a useful life of 10 years. The machinery has a fair value at the commencement of the lease of $46,000, and Tamarisk expects the machinery to have a residual value at the end of the lease term of $30,000. However, Thiensville does not guarantee any part of the residual value. Thiensville does expect that the residual value will be $44,000 instead of $30,000. What would be the amount of the annual rental payments Tamarisk demands of Thiensville, assuming each payment will be made at the end of each year and Tamarisk wishes to earn a rate of return on the lease of 6%? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275.)

Amount of equal annual lease payments?

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Answer #1

Answer:

Computation of annual rental payment
Residual value = 30000
present value (6%,4Yr) = 0.79209
Present value = 30000*0.79209
present value of residual value = 23762.7
fair value of machine = 46000
less: present value of residual value =23762.7
amount recover from lease = fair value of machine-present value of residual value
amount recover from lease = 46000-23762.7
amount recover from lease = 22237.3
annual lease payment = amount to be recover from lease/present value annuity factor (6%,4yr)
annual lease payment = 22237.3/3.46510
annual lease payment =6417.51
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