Raymond's Leasing Company signed an agreement to lease an asset that has a fair value of $800,000 on December 31, 2014. The lease will be paid in seven equal annual payments of $138,730, beginning on December 31, 2014. The interest rate included in the lease agreement is most nearly equal to
A) 8%.
B) 7%.
C) 6%.
D) 5%.

Question

Quizplus · Accepted Answer

The interest rate can be found by using a financial calculator or spreadsheet to solve for the interest rate (I/Y) that equates the present value of the lease payments to the fair value of the asset. Inputting the given values (PV = $800,000, PMT = -$138,730, N = 7, and the first payment occurring immediately, which is a type of annuity due), the interest rate that aligns with these values is closest to 7%.

Raymond's Leasing Company Signed an Agreement to Lease an Asset