Question

Novak Corporation purchased a piece of equipment for $91,000. Novak wanted to lease out the equipment to a customer for 8 years, at the end of which time the customer could purchase the equipment for $4,800 (at a time when its fair value would be $5,760). Annual payments on the lease would be due at the beginning of each year.
In order to earn a 8% return, what minimum lease payments should Novak charge its customer for this equipment lease?

Answer 1

Solution:

Let minimum lease payments to be charged = X

Now present value of minimum lease payment and bargain purchase option = $91,000

X * Cumulative PV Factor at 8% for 8 periods of annuity due + $4,800 * PV factor at 8% for 8th period = $91,000

X * 6.20637 + 0.54027 *$4,800 = $91,000

6.20637 X = $88,407

X = $14,245