Question

Fireval Machine Works Co. signs an agreement on Jan 1, 2018, to lease equipment to Reid company. the following information relates to the agreement:

>The term of the noncancable lease is 5 years with no renewal option. The equipment has an estimated economic life of 6 years

>the agrrement requires equal semi-annual payments, beginning on Jan 1, 2018.

>The cost of the asset of the lessor is 350,000. The fair value of the asset at Jan 1, 2018 is 450,000.

>The asset will revert ti the lessor at the end of the lease term at which time the asset is expected to have a residual value of $ 75,000 None of which is Guaranteed

Required:

Assuming the lessor desires a 10% return calculate the amount of the required rental payment. Round to nearest dollar, Show all calculations.

Answer 1

Ans. Calculation amount of the required rental payment

Fair value of assets 450000

Residual value = 75000

rate of return = 10% payment semi-annual payments half yearly rate of return is 5%

term of lease is 5 and total semi annual lease payment is 10

starting beginning on jan 1 2018

Cumulative present value @5%yrs for 9years = 7.1078

present value for 5% for 10yrs = 1+7.1078 = 8.1078

Pv at the end of 9 years @5% = .645

Calculation of required rental payment =   fair value-(residual valueXPv @5% at the end of 9yrs )

                                                                                                   8.1078

                                                                      = 450000 - (75000X.645) /8.1078 = $49536