Question

Johnson Company 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. Johnson desires a return of 8% interest on a five-year lease of equipment with a fair value of $970,425.

(The present value of an annuity due of $1 at 8% for five years is 4.313.) OR

(Hint: Change the calculator setting to BGN for the annuity due.)

What is the annual lease payment?

)What is the total amount of interest revenue that Johnson will earn over the life of the lease?

Answer 1

Solution:

Fair Value of the Equipment = $970,425

Life of the Equipment = 5 years

Required Rate of Return = 8%

Solution 1) Calculation of Annual Lease Payment:

Following are the steps to be followed on Microsoft Excel to calculate the Annual Lease Payment:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "PMT"
Step 4: Insert Rate = 0.08 Nper = 5 PV = -970,425 Type = 1

PMT = $225,045.56

Therefore, Johnson Company should charge an annual lease payment of $225,045.56

Solution 2) Calculation of total amount of interest revenue that Johnson will earn over the life of the lease:

Total amount of interest revenue = Total Lease Payments for 5 years – Fair value of the Equipment

= ($225,045.56 x 5) - $970,425 = $154,802.80

Therefore, total amount of interest revenue that Johnson will earn over the life of the lease is $154,802.80