Question

Please explain how to calculate fair value manually - no appendix tables, no financial calculator.

31. Hopeful Ltd leased a portable sound recording studio from Lessor Ltd. Lessor has no material initial direct costs. Hopeful Ltd does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will need a larger studio. The terms of the lease are as follows: Date of entering lease: 1 July 2019. Duration of lease: four years. Life of leased asset: five years. Lease payments: $50 000 at the beginning of each year. First lease payment: 1 July 2019. Lease expires: 1 July 2023. Interest rate implicit in the lease: 8 per cent Guaranteed residual: $40 000. REQUIRED (a) Determine the fair value of the portable sound recording studio at 1 July 2019. LO 11.7 11.10

Answer 1

Year Cash payments 01-Jul-19 $ 50,000 01-Jul-20 $ 50,000 01-Jul-21 $ 50,000 01-Jul-22 $ 50,000 01-Jul-23 $ -40,000 PV at 8% 1.0000 0.9259 0.8573 0.7938 0.7350 Total Discounted cash flows 50,000 46,295 42,865 39,690 -29,400 1,49,450 The Fair Value of portable sound equipment as on 1 July 2019 is $ 149,450.

Formulas used

в PV at 8% Year 43647 44013 44378 44743 45108 Cash payments 50000 50000 50000 50000 -40000 =ROUND(D3/1.08,4) =ROUND(D4/1.08,4) =ROUND(D5/1.08,4) =ROUND(D6/1.08,4) Total Discounted cash flows =ROUND(C3*D3,0) =ROUND(C4*D4,0) =ROUND(C5* D5,0) =ROUND(C6*D6,0) =ROUND(C7*D7,0) =SUM(E3:E7) 9