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 $800,000. 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%?
A) $85,427.
B) $93,968.
C) $13,968.
D) $40,419.

Question

Quizplus · Accepted Answer

To calculate the annual rental, we need to use the annuity formula:

PV = (PMT/i) x [1 - 1/(1+i)^n]

Where:
PV = Present value (the cost of the aircraft) = $800,000
PMT = Annual Lease Payment (what we need to find)
i = Interest rate (10% or 0.10)
n = Number of periods (20 years)

Substituting these values into the formula, we get:

$800,000 = (PMT/0.10) x [1 - 1/(1+0.10)^20]

Solving for PMT, we get:

PMT = $93,968

Therefore, the annual rental required to earn a return of 10% on a $800,000 aircraft leased for 20 years is $93,968. Answer: B.

Jeremy Leasing Purchases and Then Leases Small Aircraft to Interested