Question

Lease-A-Rama Co. leases equipment to Dunlavy Co. over a lease term of 5 years, with equal annual payments starting the first day of the lease. The fair value of the equipment is $500,000 and the expected residual value at the end of the lease term is $50,000. Lease-A-Rama expects a 12% return on investment as a result of the lease. What is the amount of the equal lease payments Dunlavy will make, and at what amount will Lease-A-Rama record its gross investment in the leaseAdditional information: Present value of an annuity due of $1 for 5 periods at 12% 4.04 Present value of $1 in four periods at 12% 0.64 Present value of $1 in five periods at 12% 0.57 Lease Payment Amount Gross Investment in Leasea. $ 116,710 $ 500,000 b. $ 115,842 $ 518,000 c. $ 116,710 $ 633,550 d. $ 115,842 $ 500,000 (A) Option a(B) Option b(C) Option c(D) Option d

Answer 1

d. $ 115,842 $ 500,000

Step-by-step explanation:

Lease-A-Rama invest 500,000

It will require a 12% return

At the end of the lease term. Also the lessor must purchase the 50,000 salvage value at the end of the useful life.

50,000 x 0.64 = 32,000

500,000 - 32,000 = 468,000

468,000 / 4.04 = 115,841.58 Lease payment

PV: of the payment

115,841.58

The gross invesment will be the value of the equipment:

500,000