Question

Khaleesi Corporation (“Khaleesi”) leases dragonglass weapons to customers. She gains a loyal following of customers because dragonglass is of limited supply but high demand due to its usefulness for the upcoming winter. Further, Khaleesi tends to offer more favorable financing terms than competitors offering substitutive products (e.g., Lannister, LLC).

Khaleesi was recently approached by the Lords of the North, Inc. (“the North”) which is interested in leasing a substantial stock of weapons over a potentially lengthy period of time. The North has indicated a willingness to pay any rate that Khaleesi Corporation demands for its dragonglass products, but generally receives an interest rate of 12% on all other borrowing transactions. The North’s management are a very noble group, so payments are reasonably assured. Further, there are no material cost uncertainties.

Khaleesi has gathered its council to discuss entering into such a contract with the North and has invited you to provide financial council. Khaleesi’s board has proposed several alternative sets of lease terms (below) and would like you determine what the North’s annual payments will be under each scenario, if payments are made at the beginning of the period.

	A	B	C
Fair value of weapons to be leased	$365,760	$365,760	$365,760
Lease Term	11 years	11 years	6 years
Useful Life of leased assets	13 years	13 years	6 years
Desired rate of return	10%	10%	13%
Residual Value (guaranteed)	$0	$24,350	$24,350

Prepare a lease amortization schedule describing the pattern of payments and interest over the lease term for both Khaleesi and the North.

Answer 1

1. Given In question

Fair Value of assets=365760

N=11 year

Desired interest rate =10%

Calculation of annual lease payment in option

=Fair value of assets -Residual Value/(1+desired Interest rate)ⁿ

(1-(1/(1+Desired interest rate)ⁿ)/Desired interest rate

=365760/6.495

=56314

Year	Value of lease asstes	Installment	Interest payment	lease value payment
1	365750	56,314.00	36,575.00	19,739.00
2	346011	56,314.00	34,601.00	21,713.00
3	324298	56,314.00	32,430.00	23,884.00
4	300414	56,314.00	30,041.00	26,273.00
5	274141	56,314.00	27,414.00	28,900.00
6	245241	56,314.00	24,524.00	31,790.00
7	213451	56,314.00	21,345.00	34,969.00
8	178482	56,314.00	17,848.00	38,466.00
9	140016	56,314.00	14,002.00	42,312.00
10	97704	56,314.00	9,770.00	46,544.00
11	51160	56,314.00	5,154.00	51,160.00

^{2.Calculation of Annual lease payment Under 2nd option}

^{Here given}

Given In question

Fair Value of assets=365760

N=11 year

Desired interest rate =10%

Residual value=24350

Calculation of annual lease payment in option

=Fair value of assets -Residual Value/(1+desired Interest rate)ⁿ

(1-(1/(1+Desired interest rate)ⁿ)/Desired interest rate

=(365760-8553)/6.495

=55000

Year	Value of lease asstes	Installment	Interest payment	lease value payment
1	365750	55,000.00	36,575.00	18,425.00
2	347325	55,000.00	34,733.00	20,267.00
3	327058	55,000.00	32,706.00	22,294.00
4	304764	55,000.00	30,476.00	24,524.00
5	280240	55,000.00	28,024.00	26,976.00
6	253264	55,000.00	25,326.00	29,674.00
7	223590	55,000.00	22,359.00	32,641.00
8	190949	55,000.00	19,095.00	35,905.00
9	155044	55,000.00	15,504.00	39,496.00
10	115548	55,000.00	11,555.00	43,445.00
11	72103	55,000.00	7,247.00	47,753.00
11	24,350.00			24,350.00

3. Caculation under 3rd option

Given In question

Fair Value of assets=365760

N=6 year

Desired interest rate =13%

Residual Value=24350

Calculation of annual lease payment in option

=Fair value of assets -Residual Value/(1+desired Interest rate)ⁿ

(1-(1/(1+Desired interest rate)ⁿ)/Desired interest rate

=88570

Year	Value of lease asstes	Installment	Interest payment	lease value payment
1	3,65,750	88,570.00	47,547.50	41,022.50
2	3,24,728	88,570.00	42,214.58	46,355.43
3	2,78,372	88,570.00	36,188.37	52,381.63
4	2,25,990	88,570.00	29,378.76	59,191.24
5	1,66,799	88,570.00	21,683.90	66,886.10
6	99,913	88,570.00	13,007.00	75,563.00
6	24,350			24,350.00