Question

Manning Imports is contemplating an agreement to lease equipment to a customer for four years. Manning normally sells the asset for a cash price of $230,000. Assume that 8% is a reasonable rate of interest. What must be the amount of quarterly lease payments (beginning at the commencement of the lease) in order for Manning to recover its normal selling price as well as be compensated for financing the asset over the lease term?

a. $12,175
b. $14,280
c. $15,620
d. $11,890

Answer 1

To calculate the amount of quarterly lease payments, use the present value of an annuity formula. The amount of lease payments must be approximately $14,280.

Step-by-step explanation:

To calculate the amount of quarterly lease payments that Manning Imports must receive in order to recover its normal selling price and be compensated for financing the asset over the lease term, we can use the present value of an annuity formula. The present value of an annuity formula is: P = R * (1 - (1 + i)^(-n)) / i, where P is the present value, R is the periodic payment, i is the interest rate per period, and n is the number of periods. In this case, the normal selling price is $230,000 and the lease term is four years, so the number of periods is 4 * 4 = 16.

The interest rate per period is 8% / 4 = 2% per quarter. Plugging the values into the formula, we get: P = R * (1 - (1 + 0.02)^(-16)) / 0.02. Solving for R, we find that R ≈ $14,280. Therefore, the amount of quarterly lease payments that Manning Imports must receive is approximately $14,280.