Question

Ace Leasing acquires equipment and leases it to customers under long-term sales-type leases. Ace earns interest under these arrangements at a 4% annual rate. Ace leased a machine it purchased for $770,000 under an arrangement that specified annual payments beginning at the commencement of the lease for five years. The lessee had the option to purchase the machine at the end of the lease term for $200,000 when it was expected to have a residual value of $330,000. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Calculate the amount of the annual lease payments. Purchase Option Table or calculator function: PV of $1 n = i = 4% Present Value 770,000 Amount to be recovered (fair value) Purchase option Amount to be recovered through periodic lease payments Lease Payment Table or calculator function: n = Lease Payments Amount of fair value recovered each lease payment

Answer 1

Calculate the amount of the annual lease payments: Purchase Option Table or Calculator function: PV of $1 Amount to be recovered (fair value) Purchase option ($200.000 * 0.8219) Amount to be recovered through periodic lease payments 4% Present Value $770.000 $164.380 $605,620 Lease Payment Table or Calculator function: PVAD of S1 5 4% Lease Payments $130,806 Amount of fair value recovered each lease payment ($605,620 / 4.6299)