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 $720,000. Benning wants to be reimbursed for financing the machine at a 12% annual interest rate over the five-year lease term. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the required lease payment if the lease agreement calls for 10 equal semiannual payments beginning six months from the date of the agreement. 2. Determine the required lease payment if the lease agreement calls for 20 equal quarterly payments beginning immediately. 3. Determine the required lease payment if the lease agreement calls for 60 equal monthly payments beginning one month from the date of the agreement. The present value of an ordinary annuity factor for n

Answer 1

Answer:

1. Determine the required lease payment if the lease agreement calls for 10 equal semiannual payments beginning six months from the date of the agreement.

we need to use the present value formula for an ordinary annuity

PV = payment x annuity factor (6%, 10 periods)

• PV = $720,000
• annuity factor = 7.3601

payment = PV / annuity factor = $720,000 / 7.3601 = $97,824.76

2. Determine the required lease payment if the lease agreement calls for 20 equal quarterly payments beginning immediately.

we need to use the present value formula for an annuity due

PV = payment x annuity due factor (3%, 20 periods)

• PV = $720,000
• annuity due factor = 15.3238

payment = PV / annuity due factor = $720,000 / 15.3832 = $46,985.73

3. Determine the required lease payment if the lease agreement calls for 60 equal monthly payments beginning one month from the date of the agreement.

we need to use the present value formula for an ordinary annuity

PV = payment x annuity factor (1%, 60 periods)

• PV = $720,000
• annuity factor = 44.95504

payment = PV / annuity factor = $720,000 / 44.95504 = $16,016