On January 1 James Industries leased equipment to a customer

On January 1, James Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $740,000 and has an expected useful life of six years. Its normal sales price is $740,000. The residual value after four years is $140,000. 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 5%. (EVof $1, PV of $1. EVAof$1, PVA of $1. EVADof $1 and PVAD of$1) (Use appropriate factor(s) from the tables provided.) Calculate the amount of the annual lease payments. Guaranteed Residual Value Table or calculator function Present value Amount to be recovered (fair value) Guaranteed residual value Amount to be recovered through periodic lease payments Lease Payment Table or calculator function Lease Payments Amount of fair value recovered each lease payment

Solution

Guaranteed residual value n 4 i 5% present value Amount to be recovered 740000 Guaranteed residual value [PVF 5%,4*Residual value] (115178) Amount to be recovered from periodic payments 624822 Lease payment n 4 i 5% lease payment Amount of fair value recovered each payment =[Amount to be recovered from periodic payments/PVA 5%,4] 176207.22 [624822/3.54595]