Brief Exercise 21A9 Windsor Inc wishes to lease machinery to

Brief Exercise 21A-9 Windsor Inc. wishes to lease machinery to Thiensville Company. Thiensville wants the machinery for 4 years, although it has a useful life of 10 years. The machinery has a fair value at the commencement of the lease of $50,000, and Windsor expects the machinery to have a residual value at the end of the lease term of $26,000. However, Thiensville does not guarantee any part of the residual value. Thiensville does expect that the residual value will be $48,000 instead of $26,000 What would be the amount of the annual rental payments Windsor demands of Thiensville, assuming each payment will be made at the end of each year and Windsor wishes to earn a rate of return on the lease of 6%? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275.) Amount of equal annual lease payments

Solution

calculation of equal annual lease payment is calculated by following formula

Annual payment = cost of machine / present value of rate of return

Cost of machine = $ 50000 ( Fair market value is taken as cost of machine )  

Rate of return = 6 %

Term of lease = 4 years

Present value of rate of return = 3.46511

Annual lease payment = 50000 / 3.46511

= 14429.556 ( ie ) $ 14430