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On January 1, 2017, Wood Corporation leases a piece of equipment from Prior Corporation and properly...

On January 1, 2017, Wood Corporation leases a piece of equipment from Prior Corporation and properly accounts for the equipment as a finance lease. Under the agreement, Wood will make 10 annual payments of $600,000 each January 1st. At the end of 10 years, Wood has the option of buying the equipment for $200,000, when the estimated fair value will be $400,000. If Wood's incremental borrowing rate is 7%, what is the present value of the minimum lease payments? None of the above 4,017,926.10 4,610,809.21 4,315,818.78

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Answer #1

Annual interest rate, RATE Number of lease payments, NPER Annual lease payments, PMT Salvage value at the end, FV Annual compounding type, TYPE Present Value today 796 10 $600,000 $200,000 0 0 if lease paid at the end of each year; 1 if lease paid at the beginning of each year $4,112,479.07 [Ref: NOTE] NOTE Present Value today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate-7%; nper-10; pmt-600000; fv-200000, type :0; Here, value for pmt is positive as it denotes cash outflow; fv is negative as it denotes cash inflow; type 0 as lease paid at the end of each year only 1 Annual interest rate, RATE 2 Number of lease payments, NPER 3 Annual lease payments, PMT 4 Salvage value at the end, FV 5 Annual compounding type, TYPE 6 Present Value today 796 10 $600,000 $200,000 0-0 if lease paid at the end of each year; 1 if lease paid at the beginning of each year. -PV(B1,B2,-B3,B4,B5) [Ref: NOTE]

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