Question

Jill Porris is presently leasing a small business computer from Rice

Office Equipment Company. The lease requires 6 annual payments of $2,000 at the end of each year and provides the lessor (Rice) with an 10% return on its investment.

(a) Assuming the computer has a six-year life and will have no salvage value at the expiration of the lease, what was the original cost of the computer to Porris?

$ __________

(b) What amount would each payment be if the six annual payments are to be made at the beginning of each period?

$ __________

Answer 1

	In both the case we need to compute the present value of lease payment to arrive at the answer
	Question (a)	The answer is $ 8,711
		Year	Lease payment	Present value factor@ 10%	Present value of lease payment
		A	B	C=1/(1+10%)^A	D=C*B
		1	2000	0.9091	1,818
		2	2000	0.8264	1,653
		3	2000	0.7513	1,503
		4	2000	0.6830	1,366
		5	2000	0.6209	1,242
		6	2000	0.5645	1,129
					8,711
	Question (b)	The answer is $ 9,582
		Year	Lease payment	Present value factor@ 10%	Present value of lease payment
		A	B	C=1/(1+10%)^A	D=C*B
	Since the lease payments are made at the beginning of each year	0	2000	1.0000	2,000
		1	2000	0.9091	1,818
		2	2000	0.8264	1,653
		3	2000	0.7513	1,503
		4	2000	0.6830	1,366
		5	2000	0.6209	1,242
					9,582