Kensington Ltd decides to lease some equipment from Piccadilly Ltd on the following terms: If the interest rate implicit in the lease is 8 per cent,what is the fair value of the equipment at the inception of the lease (rounded to the nearest dollar)?

Question

Kensington Ltd decides to lease some equipment from Piccadilly Ltd on the following terms:  If the interest rate implicit in the lease is 8 per cent,what is the fair value of the equipment at the inception of the lease (rounded to the nearest dollar)?

Quizplus · Accepted Answer

To calculate the fair value of the equipment, we need to use the present value of the lease payments. Using the given information and the formula for present value of an annuity, we get:

PV = (15,000 x 3.605) / (1 + 0.08)^3
PV = 46,094

Therefore, the fair value of the equipment at the inception of the lease is $46,094, which is closest to option B.

Kensington Ltd Decides to Lease Some Equipment from Piccadilly Ltd