An asset with a market value of $100,000 is leased on January 1,2014.Five annual lease payments are due each January 1 beginning January 1,2014.The lessee guarantees the $40,000 residual value of the asset as of the end of the lease term on December 31,2018.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 need to use the present value of annuity formula:

PV = PMT x [1 - 1/(1+i)^n] / i

Where:
PV = Present value of the lease (market value of the asset)
PMT = Annual lease payment
i = Interest rate
n = Number of payments

Using the given values:
PV = $100,000
i = 8%
n = 5

We can solve for PMT:

PMT = PV x i / [1 - 1/(1+i)^n]

PMT = $100,000 x 8% / [1 - 1/(1+8%)^5]

PMT = $100,000 x 8% / 3.9927

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