In: Accounting
Jenny bought a rental property for $900,000 and leased it for 3 years. Rents will be paid at the beginning of each month and the residual value after 3 years will be $700,000. To earn 8% rate of return per year on this lease, how much rent/month should be charged?
Instructions: use the Compound interest tables to solve
-Future value of 1 (future value of a single sum)
-Present value of 1 (present value of a single sum)
-Future value of an ordinary annuity of 1
-Present value of an ordinary annuity of 1
-Present value of an annuity Due of 1
Calculation of monthly lease rental | Amount $ | |||
Fair value of asset | $ 900,000 | |||
Add: Initial direct cost | ||||
a | $ 900,000 | |||
Less: Present value of guaranteed residual value | $ - | |||
Less: Present value of unguaranteed residual value | $ (551,078) | ($700,000*0.78725) | ||
b | $ 348,922 | |||
Annuity factor for implicit rate | c | 32.12455 | (8%/12 month=0.666667% monthly factor) | |
Lease rent per month | d=b/c | $ 10,862 | ($348,922/32.12455) | |