Question

Skysong Inc. wishes to lease machinery to Thiensville Company. Thiensville wants the machinery for 4 years, although it has a useful life of 10years. The machinery has a fair value at the commencement of the lease of $42,000, and Skysong epects the machinery to have a residual value at the end of the lease term of $29,000. However, Thiensville does not guarantee any part of the residual value. Thiensvile does expect that the residual value will be $40,000 instead of $29,000 What would be the amount of the annual rental payments Skysong demands of Thiensville, assuming each payment will be made at the end of each year and Skysong wishes to earn a rate of return on the lease of 6%2 (For calculation purposes, use 5 declmal places as displayed in the factor toble provided and round final answer to O decimal places, es 5,275) Click here to view factor tables Amount of equal annual lease payments $

Answer 1

Formula:

fair value = (annual lease payment x PVAF) + (residual value x PVF)

$42000 = (annual lease payment x 3.46511) + ($29000 x 0.79209)

annual lease payment x 3.46511 = $42000 - $22970.61

annual lease payment = 19029.39/3.46511

= $5492

therefore, amount of equal annual lease payment is $5492

where,

PVAF(6%, 4) = 3.46511

PVF(6%, 4) = 0.79209