Question

On January 1, James Industries leased equipment to a customer for a five-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $830,000 and has an expected useful life of seven years. Its normal sales price is $830,000. The residual value after five 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.

Answer 1

James Industries

The amount of the annual lease payments is:

= $207,878.86.

Step-by-step explanation:

a) Data and Calculations:

Cost of equipment = $830,000

Normal sales price = $830,000

Residual value after 5 years = $200,000

Interest rate = 8%

Lease period = 5 years

From an online financial calculator:

Loan Amount 830000

Loan Term 5 years

Interest Rate 8

Results:

Payment Every Year $207,878.86

Total of 5 Payments $1,039,394.29

Total Interest $209,394.29

Lease Payment Schedule:

Period PV PMT Interest FV

1 $830,000.00 $-207,878.86 $66,400.00 $-688,521.14

2 $688,521.14 $-207,878.86 $55,081.69 $-535,723.98

3 $535,723.98 $-207,878.86 $42,857.92 $-370,703.04

4 $370,703.04 $-207,878.86 $29,656.24 $-192,480.42

5 $192,480.42 $-207,878.86 $15,398.43 $0.00