Question

Sheridan Limited has signed a lease agreement with Sunland Corp. to lease equipment with an expected lifespan of eight years, no estimated salvage value, and a cost to Suniand, the lessor of $204,000. The terms of the lease are as follows: The lease term begins on January 1,2022, and runs for 5 years. The lease requires payments of $44,875 at the beginning of each year starting January 1, 2022. At the end of the lease term, the equipment is to be returned to the lessor. Sunland' implied interest rate is 5%, while sheridan's borrowing rate is 6%. Sheridan uses straight-line depreciation for similar equipment. The year-end for both companies is December 31 . Assuming that both companies follow ASPE: Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE. (a) Determine the present value of the minimum lease payments. (Round factor values to 5 decimal places. 6.8. 1.25124 and final answers to 0 decimal ploces. e.g. 5.275.) Present value

Answer 1

To determine the present value of the minimum lease payments for Sheridan Limited's lease agreement, multiply the annual payment of $44,875 by the present value factor for an annuity due at 5% interest over 5 years from the provided factor tables, then round as required.

Step-by-step explanation:

To determine the present value of the minimum lease payments that Sheridan Limited must make to Sunland Corp., we need to calculate the present value of an annuity due, as payments are made at the beginning of each period. Given an annual payment of $44,875, an interest rate of 5%, and a lease term of 5 years, we can use the present value of an annuity due formula:

`PV = Pmt * [(1 - (1 + r)^(-n)) / r] * (1 + r)`

Where Pmt is the annual payment, r is the interest rate per period, and n is the number of periods.

Assuming the provided factor table and using a 5% interest rate, the present value of the lease payments would typically be calculated using the present value of annuity due factors from the table. However, since specific factor values are not provided within this question, you would refer to the table for the 5% rate over 5 periods to get the present value factor for an annuity due. Multiply the annual payment by this factor to find the present value.

For example, if the factor was 4.32948 (hypothetical value for illustration), the calculation would be:

PV = $44,875 × 4.32948

This results in a present value of the minimum lease payments around $194,226. However, the exact present value would require the actual factor from the provided table which is not included in the question. The lessee would then round this value to the nearest dollar if required.