Homework Answers
Solution:
Fair value of machine = $50,000
Annual lease payment = $20,10
Let implicit rate = i
Now at i, present value of lease payment = $50,000
Let calculated present value of lease payments at 22% and 23%
At 22% = $20,100 * Cumulative PV factor at 22% for 3 periods of annuity due
= $20,100 * 2.491535 = $50,080
At 23% = $20,100 * Cumulative PV factor at 23% for 3 periods of annuity due
= $20,100 * 2.47399 = $49,727
Implicit rate = 22% + ($50,080 - $50,000) / ($50,080 - $49,727)
= 22.22%
Hence option D is correct.
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