Assume Sunny Corp.(a company reporting under IFRS)wants to earn an 8% return on its investment of $1,200,000 in an asset that is to be leased to Cloudy Corp.for ten years with an annual rental due in advance each year.How much should Sunny charge for annual rental assuming there is no purchase option that is reasonably certain to be exercised by Cloudy Corp.?
A)$120,000
B)$165,588
C)$178,835
D)$216,000

Question

Quizplus · Accepted Answer

The calculation for annual rental is as follows:
PV of lease payments = $1,200,000
Annual rental payment =?
Yield rate = 8%
Number of periods = 10
Using the formula to calculate the present value of an annuity due, we get:
$1,200,000 = R x ((1- (1/(1+8%)^10))/8%)*(1+8%)
Solving for R, we get:
R = $165,588. Therefore, the annual rental should be $165,588. Answer B is correct.