Question

The Hardaway Corporation plans to lease a $880,000 asset to the O’Neil Corporation. The lease will be for 11 years. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. If the Hardaway Corporation desires a return of 10 percent on its investment, how much should the lease payments be? (Do not round intermediate calculations and round your answer to 2 decimal places.) b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $880,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a return of 10 percent on the 11-year lease. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

Purchase = $880,000

Term of Lease = 11 year

Require Return = 10%.

a,

Value of annual lease payment (assume all payment at end of period) is calculated in excel and screen shot provided below:

Value of annual lease payment (assume all payment at end of period) is $135,487.56.

b.

If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $880,000. So

Net Cost of Machine = $880,000 × (1 - 10%)

= $792,000.

Net Cost of machine after deduction is $792,000.

If Hardaway Corporation wants to pass the benefits along to the O’Neil Corporation in the form of lower lease payments. Then Revised Lease payment is calculated in excel and screen shot provided below:

Revised lease payment is $121,938.81.