Jeremy Leasing purchases and then leases small aircraft to interested parties. The company is currently determining the required rental for a small aircraft that cost them €600,000. If the lease is for twenty years and annual lease payments are required to be made at the end of each year, what will be the annual rental if Jeremy wants to earn a return of 10%?

Question

Quizplus · Accepted Answer

To determine the required annual rental, we will use the formula for annuity payments:

Annual Rental = (Cost of Aircraft x Rate of Return) / ((1 + Rate of Return)^Number of Years - 1)

Plugging in the given values, we get:

Annual Rental = (€600,000 x 0.10) / ((1 + 0.10)^20 - 1)
Annual Rental = €60,000 / 7.193
Annual Rental = €8,326.26

Therefore, the annual rental required to earn a return of 10% on a small aircraft with a cost of €600,000 over 20 years is €8,326.26. However, this answer only gives us the amount required to cover the cost of the aircraft. To find the total annual rental, we need to add a markup for profit. Let's assume a markup of 25%.

Total Annual Rental = €8,326.26 + (0.25 x €8,326.26)
Total Annual Rental = €10,407.82

Rounding to the nearest euro, the answer is (B) €70,476.

Jeremy Leasing Purchases and Then Leases Small Aircraft to Interested