Question

On December 31, 2019, Metlock Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Metlock to make annual payments of $8,482 at the beginning of each year of the lease, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Metlock uses the straight-line method of depreciation for all of its plant assets. Metlockâs incremental borrowing rate is 5%, and the lessorâs implicit rate is unknown.

Required:
Compute the present value of the lease payments.

Answer 1

$38,559

Step-by-step explanation:

Computation of present value of lease payments

Using this formula

Present value of lease payments=annual payments*Present value of an annuity due of 1 for 5 periods at 5%

Let plug in the formula

Present value of lease payments=$8,482 × 4.54595

Present value of lease payments= $38,559

Therefore the present value of lease payments is $38,559