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Bates Company has entered into two lease agreements. In each case the cash equivalent purchase price...

Bates Company has entered into two lease agreements. In each case the cash equivalent purchase price of the asset acquired is known and you wish to find the interest rate which is applicable to the lease payments.

Lease A - Lease A covers office equipment which could be purchased for $165,500. Bates Company has, however, chosen to lease the equipment for $38,000 per year, payable at the end of each of the next 6 years.

Calculate the implied interest rate for the lease payments. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5%.) Interest Rate ____%

Lease B - Lease B applies to a machine which can be purchased for $167,572. Bates Company has chosen to lease the machine for $27,000 per year on a 8-year lease. Payments are due at the start of each year.

Calculate the implied interest rate for the lease payments. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5%.) Interest Rate _____%

Solutions

Expert Solution

Number 1
Year Receipt Payment Net Receipt/Payment
0 165500 165500
1 -38000 -38000
2 -38000 -38000
3 -38000 -38000
4 -38000 -38000
5 -38000 -38000
6 -38000 -38000
Net 165500 -228000 -62500
Implicit Rate IRR(sum of Net Receipt/Payment from 0year to 6Year)
10%
Number 2
Year Receipt Payment Net Receipt/Payment
0 167572 -27000 140572
1 -27000 -27000
2 -27000 -27000
3 -27000 -27000
4 -27000 -27000
5 -27000 -27000
6 -27000 -27000
7 -27000 -27000
Net 167572 -216000 -48428
Implicit Rate IRR(sum of Net Receipt/Payment from 0year to 7Year)
8%

ekkarill92 answered 2 years ago
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