Question

Kingbird Inc. wishes to lease machinery to Thiensville Company. Thiensville wants the machinery for 4 years, although it has a useful life of 10 years. The machinery has a fair value at the commencement of the lease of $49,000, and Kingbird expects the machinery to have a residual value at the end of the lease term of $25,000. However, Thiensville does not guarantee any part of the residual value. Thiensville does expect that the residual value will be $47,000 instead of $25,000.

What would be the amount of the annual rental payments Kingbird demands of Thiensville, assuming each payment will be made at the end of each year and Kingbird wishes to earn a rate of return on the lease of 4%?

Answer 1

on belot solution calculate amount of equal annual lease payment as shown Expected residual value of Lessor 25000 x pv factor of $1 at (4% , 4 Years) 0.8548 present value of Expected residual value 21370 1 of Lessor fair value of asset 49000 Less: present value of expected residual 21370 - value of Lessor Amount to be recovered through tease 27630 1 - payments & by pv factor of annuity at [4%,4 Years] 3.6299 Amount of equal annual Lease paymorts 7612 fence, the amount of equal annual lease payment is 7612