Question

Jagadison Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease and the leases do not contain purchase options. Jagadison desires a return of 11% interest on a four-year lease of equipment with a fair value of $795,564. The present value of an annuity due of $1 at 11% for four years is 3.444. What is the total amount of interest revenue that Jagadison will earn over the life of the lease?

a. 128436
b. 198891
c. 231000
d. 350048

Answer 1

Answer: a. $128,436

Step-by-step explanation:

The lease payment will be constant and so can be considered to be an annuity.

The fair value of the lease is the present value of the annuity and because this is a lease and payments are made as soon as the asset is received, this is an annuity due.

Present value of annuity due = Annuity * Present value of annuity due interest factor, 11%, 4 years

795,564 = Annuity * 3.444

Annuity = 795,564 / 3.444

= $231,000

Interest revenue is:

= Total amount paid - Fair value

= (231,000 * 4 years) - 795,564

= $128,436