Question

Benning Manufacturing Company is negotiating with a customer for the lease of a large machine manufactured by Benning. The machine has a cash price of $980,000. Benning wants to be reimbursed for financing the machine at a 9% annual interest rate.Required: 1. Determine the required lease payment if the lease agreement calls for 10 equal annual payments beginning immediately. 2. Determine the required lease payment if the first of 10 annual payments will be made one year from the date of the agreement. 3. Determine the required lease payment if the first of 10 annual payments will be made immediately and Benning will be able to sell the machine to another customer for $68,000 at the end of the 10-year lease.

Answer 1

Answer:

Task 1:

Determine the required lease payment if the lease agreement calls for 10 equal annual payments beginning immediately.

Answer: $140,100

Task 2:

Determine the required lease payment if the first of 10 annual payments will be made one year from the date of the agreement:

Answer: $152,696

Task 3:

Determine the required lease payment if the first of 10 annual payments will be made immediately and Benning will be able to sell the machine to another customer for $68,000 at the end of the 10-year lease.

Answer: $148,224

Explanation:

Machine price = $980,000

Annual interest rate = 9%

Task 1:

Lease payment, if the 10 payments begin immediately:

= $980,000/1+5.995 = $140,100

Task 2:

Lease payments, if the first of 10 annual payments will be made one year from the date of the agreement:

$980,000/6.418 = $152,696

Task 3:

Present value = $980,000

Period = 10

Rate = 9%

Residual value = $68,000

Present value of residual = $68,000* PV(9%,10) = $68,000*0.422 (from present value table) = $28,696

Annual payment = ($980,000 - $28,696)/PV(9%,10)

Annual payment = $951,304/6.418 = $148,224