Question

Ace Leasing acquires equipment and leases it to customers under long-term sales-type leases. Ace earns Interest under these arrangements at a 5% annual rate. Ace leased a machine It purchased for $640,000 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 $100,000 when it was expected to have a residual value of $200,000. (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: Present Value Amount to be recovered (fair value) Purchase option Amount to be recovered through periodic lease payments Lease Payment Table or calculator function: Lease Payments Amount of fair value recovered each lease payment

Answer 1

Purchase option
Table or calculator function	Present value of $1
n	5 years
i	5%
	Present value
Amount to be recovered (Fair value)	$640,000
Purchase option ($100,000*0.78353)	78,353
Amount to be recovered through periodic lease payments	$561,647
Lease payments
Table or calculator function:	Present value of annuity due of $1
n	5 years
i	5%
	Lease payment
Amount of fair value recovered each lease payment ($561,647/4.54595)	$123,549