Bourne Corporation has an asset with a fair market value of $ 400,000 that it wants to lease. Frank's wants to recover its net investment in the leased asset and earn a 5% return. The asset will revert back to Frank's at the end of a 5-year lease term. If Frank's charges rent annually at the beginning of the year, what should amount should the annual rent be (rounded to whole dollars)?
A) $ 20,000
B) $ 21,997
C) $ 87,989
D) $ 92,400

Question

Quizplus · Accepted Answer

To find the annual rent Frank's should charge, we use the formula for the present value of an annuity due since the payments are made at the beginning of each period. The formula is $PMT = \frac{PV}{\frac{1 - (1 + r)^{-n}}{r} \times (1 + r)}$, where PMT is the payment (annual rent), PV is the present value ($400,000), r is the annual interest rate (5% or 0.05), and n is the number of periods (5 years). Solving for PMT gives us approximately $87,989.

Bourne Corporation Has an Asset with a Fair Market Value