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grin007 [14]
3 years ago
6

Jagadison Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of

the lease and the leases do not contain purchase options. Jagadison desires a return of 12% interest on a five-year lease of equipment with a fair value of $989,065.Jagadison Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease and the leases do not contain purchase options. Jagadison desires a return of 12% interest on a five-year lease of equipment with a fair value of $989,065.
Required:
What is the total amount of interest revenue that Jagadison will earn over the life of the lease?
Business
1 answer:
Rasek [7]3 years ago
7 0

Answer: $235,844

Explanation:

Interest revenue = Total lease payments - Fair value of equipment

The lease payments are constant and so are an annuity and will be an annuity due because the first lease payment of such leases are made immediately.

Present value of lease payments = Annuity * Present value factor of Annuity due, 5 years, 12%

989,065 = Annuity * 4.0373

Annuity = 989,065 / 4.0373

= $244,981.79

Total lease payments = Lease payments * number of years

= 244,981.79 * 5

= $1,224,908.95

Interest revenue = 1,224,908.95 - 989,065

= $235,843.95

= $235,844

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