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A $2500 computer system can be leased for $79 per month for 3years. After 3years it...

A $2500 computer system can be leased for $79 per month for 3years. After 3years it can be purchased for $750. This is also the salvage value if the system was purchased originally. what is the effective annual rate for leasing the computer?

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Answer #1

From the information provided we have

-2500 + 750(P/F, i%, 36) = -79(P/A, i%, 36).

This implies we have the NPV = 0 at effective rate of interest i% so that NPV = -2500 + 750(P/F, i%, 36) + 79(P/A, i%, 36).

Using interpolation we have i% = 1% giving NPV = 402.69 and i% = 2% giving NPV = -118.71

Monthly rate of interest = 1% + (2% - 1%)*(402.69/(402.69+118.71)) = 1.7% (using excel, this is found be close to 1.747%).

Effective annual rate of interest = 20.96%.

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