Question

On January 1, James Industries leased equipment to a customer for a six-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $890,000 and has an expected useful life of eight years. Its normal sales price is $890,000. The residual value after six years is $200,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 8%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Calculate the amount of the annual lease payments. (Enter amounts as positive values rounded to the nearest whole dollar.)

Answer 1

James Industries

The amount of the annual lease payments is:

= $149,258.

Step-by-step explanation:

a) Data and Calculations:

Cost of equipment = $890,000

Residual value = $200,000

Net value = $690,000

Estimated useful life = 8 years

Lease period = 6 years

Lease Liability = $895,545.70

From an online financial calculator:

Annual PMT = $149,257.62

Sum of all periodic payments $895,545.70

Total Interest $205,545.70

Schedule of Lease Annual Payments:

Period PV PMT Interest FV

1 $690,000.00 $-149,257.62 $55,200.00 $-595,942.38

2 $595,942.38 $-149,257.62 $47,675.39 $-494,360.16

3 $494,360.16 $-149,257.62 $39,548.81 $-384,651.35

4 $384,651.35 $-149,257.62 $30,772.11 $-266,165.85

5 $266,165.85 $-149,257.62 $21,293.27 $-138,201.50

6 $138,201.50 $-149,257.62 $11,056.12 $0.00