Equipment with a fair value of $625,000 and zero residual value is to be leased through annual lease payments made at the start of each year over 10 years. If interest is 6% compounded quarterly, determine the value of the annual lease payments.
A) $53,385.45
B) $58,478.56
C) $62,500.00
D) $80,000.06
E) $80,525.57

Question

Quizplus · Accepted Answer

To find the annual lease payment, we need to calculate the present value of an annuity due. The interest rate per period is 1.5% (6% annually compounded quarterly), and there are 40 periods (10 years with quarterly compounding). The present value of the lease payments should equal the fair value of the equipment, $625,000. Using the formula for the present value of an annuity due and solving for the payment, we find that the correct annual lease payment is approximately $80,525.57.

Equipment with a Fair Value of $625,000 and Zero Residual