Marcos Mill Equipment sales and rental is bringing in a new type of 3-roller feeder. Its price from the manufacturer is $761. The company is expecting to lease equipment for four years with the payments starting immediately and then bring the feeder into its used equipment inventory at a cost of goods of $180. If the company requires a 12% return, what should the annual lease payment be?

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of goods when the feeder is brought into the used equipment inventory after four years.
Cost of goods = $180

We need to calculate the present value of the cost of goods after four years, using the formula:
Present value = Future value / (1 + r)^n

where r is the discount rate (12%) and n is the number of years (4).

Present value of cost of goods = $180 / (1 + 0.12)^4
= $107.95

Now, we need to calculate the present value of the lease payments, using the formula:
Present value of lease payments = Annual lease payment * [1 - (1 + r)^-n] / r

where r is the discount rate (12%) and n is the number of years (4).

We know the present value of the cost of goods and the price of the feeder from the manufacturer. Using these numbers, we can calculate the total present value of the investment, which will be equal to the present value of the cost of goods plus the present value of the lease payments.

Total present value of investment = Present value of cost of goods + Present value of lease payments
$761 + $107.95 = $868.95

We can rearrange the formula for the present value of lease payments to solve for the annual lease payment.

Annual lease payment = Present value of lease payments * r / [1 - (1 + r)^-n]
= ($868.95 - $180) * 0.12 / [1 - (1 + 0.12)^-4]
= $190.45

Rounding to the nearest dollar, the annual lease payment should be $190. Therefore, the best choice is C.

Marcos Mill Equipment Sales and Rental Is Bringing in a New