Question

The Hegan Corporation plans to lease a $830,000 asset to the Doby Corporation. The lease will be for 15 years. Lease payments, payable at the beginning of the year. (Use a Financial calculator to arrive at the answers. Round the final answers to nearest whole dollar.)    

a. If the Hegan Corporation desires a 11 percent return on its investment, how much should the lease payments be?

Lease payment           $

b. If the Hegan Corporation is able to generate $125,000 in immediate tax shield benefits from the asset to be purchased for the lease arrangement and will pass the benefits along to the Doby Corporation in the form of lower lease payments, how much should the revised lease payments be? Continue to assume the Hegan Corporation desires a 11 percent return on the 15-year lease.  

Revised lease payment           $

Answer 1

Solution

a.Information provided:

Present value= $830,000

Time= 15 years

Interest rate= 11%

The question pertains to annuity due payments.

Annity due refers to the annuity payments made at the beginning of the period.

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator.

Enter the below in a financial calculator to compute the amount of lease payments:

PV= -830,000

N= 15

I/Y= 11

Press the CPT key and PMT to compute the amount of lease payments.

The value obtained is 103,985.72.

Therefore, the lease payments are $103,985.72.

b.Information provided:

Present value= $125,000

Time= 15 years

Interest rate= 11%

Annity due refers to the annuity payments made at the beginning of the period.

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator.

Enter the below in a financial calculator to compute the amount of lease payments:

PV= -125,000

N= 15

I/Y= 11

Press the CPT key and PMT to compute the amount of lease payments.

The value obtained is 15,660.50.

Therefore, the revised lease payments are $15,660.50.