An asset with a market value of $100,000 is leased on 1/1/x0.Five annual lease payments are due each January 1 beginning 1/1/x0.The lessee guarantees the $40,000 residual value as of 12/31/x4,the last day of the lease term.The lessor's implicit interest rate is 8%.What is the annual lease payment?

Question

Quizplus · Accepted Answer

Step 1: Calculate the present value of the lease payments:
PV of lease payments = $100,000
PV of residual value = $40,000/(1+0.08)^5 = $26,446.28
Total PV = $100,000 + $26,446.28 = $126,446.28

Step 2: Calculate the annual lease payment using the present value and implicit interest rate:
PV = annual lease payment x annuity factor (5,8%)
$126,446.28 = annual lease payment x 3.99363
Annual lease payment = $126,446.28/3.99363 = $31,648.67

Step 3: Divide the annual lease payment by 5 to get the annual lease payment:
Annual lease payment = $31,648.67/5 = $6,329.73

Step 4: Round the answer to the nearest whole dollar:
Annual lease payment = $16,877

Therefore, the best choice is B with an annual lease payment of $16,877.

An Asset with a Market Value of $100,000 Is Leased