The concluding part of the question
Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?
Answer:
$51,600
Explanation:
Given that the total interest over the term amounts to the change between total lease payments and the fair value of the property at inception.
Hence, we have the following:
Let PV = annual rent x annuity due factor;
Hence, annual rent = PV / annuity due factor;
Then annual rent = $323,400 / 4.312 = $75,000;
Therefore, Gross investment = $75,000 per year x 5 years = $375,000;
Then, we have Interest revenue = gross investment – net investment = $375,000 – $323,400 = $51,600;
Hence, the total amount of interest revenue that Glade will earn over the life of the lease is $51,600.
