Question

Mays Company has a machine with a cost of $750,000 which also is its fair value on the date the machine is leased to Park Company.

The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $75,000.

If the lessor’s interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be:

Group of answer choices

$154,623.

$125,000.

$146,587.

$162,874.

Answer 1

Present value of unguaranteed residual value = $75000/1.12^6
=$38000
Present value of lease payment = $750000-38000
=$712000
Present Value Of An Annuity Due
=C + C*[1-(1+i)^-(n-1)]/i]
Where,
C= Cash Flow per period
i = interest rate per period
n=number of period
$712000= $C+C[ 1-(1+0.12)^-(6-1) /0.12]
$712000= $C+C[ 1-(1.12)^-5 /0.12]
712000= $C+C[ (0.4326) ] /0.12
C =$154623
Correct Answer = $154623