Question

Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, and requires payments of $25,000 at the end of each year. The equipment has a fair value at the inception of the lease of $175,000 and an estimated useful life of 20 years. The lease agreement stipulates that Folio receive a rate of return of 8% each year. Montevallo’s incremental borrowing rate is 10% each year.

Assume that there is no bargain purchase option and that Montevallo guarantees the $20,000 estimated residual value at the end of the 10-year lease. Montevallo estimates that it is probable that it will have to pay $15,000 cash due to the residual value guarantee.

Calculate the present value of the lease payments. Round your answer to the nearest dollar.

Answer 1

Computation of present value payments of lease. Note for the purpose of have to be montevallo's brrowing rate i.e @ 101 discounting we Incremental - Lease payment pia - $ 25000 Lease terry - 10 years Guranteed resideal value - $ 20.000 present value of lease payments al $25000 XPVAR @ 101 por 10 yearst $20.000 X pur at the end of loth year $ 25000 x 6:1446 + $ 20,000 X0:3855) $ 161325 & I present value of lease payments $ 161325