For the following lease,determine the minimum present value calculation for the lessee.
$$\begin{array} { | l | l | }
\hline \text { Annual payment (due at end of year) } & \$ 22,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental rate } & 10 \% \
\hline \text { Implicit rate (unknown to lessee) } & 8 \% \
\hline \text { Unguaranteed residual value } & 15,000 \
\hline \text { Bargain purchase option } & 5,000 \
\hline
\end{array}$$
A)86,502
B)91,243
C)95,816
D)101,451

Question

For the following lease,determine the minimum present value calculation for the lessee.
$$\begin{array} { | l | l | } 
\hline \text { Annual payment (due at end of year) } & \$ 22,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental rate } & 10 \% \
\hline \text { Implicit rate (unknown to lessee) } & 8 \% \
\hline \text { Unguaranteed residual value } & 15,000 \
\hline \text { Bargain purchase option } & 5,000 \
\hline
\end{array}$$
A)86,502
B)91,243
C)95,816
D)101,451

Quizplus · Accepted Answer

To determine the minimum present value calculation for the lessee, we need to calculate the present value of all lease payments using the lessee's incremental borrowing rate. For this lease, the payments are $15,000 at the beginning of each month for 6 years (72 months) with a payment in arrears in the first month.

Using a financial calculator or spreadsheet function, the present value of these payments at the lessee's incremental borrowing rate of 7% is $86,502. Therefore, the best choice is A).

For the Following Lease,determine the Minimum Present Value Calculation for the Lessee