An asset with a market value of $100,000 is leased on January 1, 2011. Five annual lease payments are due each January 1 beginning January 1, 2011. The lessee guarantees the $40,000 residual value of the asset as of the end of the lease term on December 31, 2015. The lessor's implicit interest rate is 8%.
What is the annual lease payment?
A) $18,227
B) $16,877
C) $23,191
D) $25,046

Question

Quizplus · Accepted Answer

To calculate the annual lease payment, we first need to calculate the present value of the lease payments and the residual value guaranteed by the lessee using the implicit interest rate of 8%.

PV of lease payments = $100,000
PV of residual value = $31,176.47 [($40,000 / (1+0.08)^5)]

Total PV = $131,176.47

Using the PV formula: PV = PMT x [(1 - (1/(1+r)^n))/r], we can solve for the annual lease payment (PMT).

PMT = $16,877

Therefore, the annual lease payment is $16,877. Option B is the correct answer.

An Asset with a Market Value of $100,000 Is Leased