Question

Sweet Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Pharoah Medical Center for a period of 10 years. The normal selling price of the machine is $515,916, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be $14,500. The hospital will pay rents of $60,000 at the beginning of each year. Sweet incurred costs of $273,000 in manufacturing the machine and $13,000 in legal fees directly related to the signing of the lease. Sweet has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 4%. Pharoah Medical Center has an incremental borrowing rate of 4% and an expected residual value at the end of the lease of $10,000. Click here to view factor tables (a2) Compute the amount of the initial lease liability. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.) Initial Lease Liability Click if you would like to Show Work for this question: Open Show Work

Answer 1

Initial Liability :
PV of lease payments, $60,000 X 8.43533 (PV of an annuity due @ 4%,10 )	$ 506,119.80
PV of guaranteed residual value, $14,500 X .67556 (PV @ 4%,10)	$     9,795.62
Initial lease liability	$ 515,915.42