Question

Ace Leasing acquires equipment and leases it to customers under long-term sales-type leases. Ace earns interest under these arrangements at a 5% annual rate. Ace leased a machine it purchased for $710,000 under an arrangement that specified annual payments beginning at the commencement of the lease for five years. The lessee had the option to purchase the machine at the end of the lease term for $100,000 when it was expected to have a residual value of $270,000. (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.)Calculate the amount of the annual lease payments.

Answer 1

Answer and Explanation:

The computation is shown below:

Amount to be recovered = $710,000

Present value of bargain purchase option is

= $100,000 × PV factor at 5% for 5th period

= $100,000 × 0.783526166

= $78,352.62

The Amount to be recoverd via periodic lease payment is

= $710,000 - $78,352.62

= $631,647.38

The Annual lease payment is

= $631,647.38 ÷ Cumulative PV factor for annuity due at 5% for 5 periods

= $631,647.38 ÷ 4.545951

= $138,947.25