Your firm is considering leasing a $50,000 copier. The copier has an estimated e
ID: 2384133 • Letter: Y
Question
Your firm is considering leasing a $50,000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9% APR with monthly compounding. Classify each lease below as a capital lease or operating lease:
A four-year fair market value lease with payments of $1150 per month
A six-year fair market value lease with payments of $790 per month
A five-year fair market value lease with payments of $925 per month
Afive-yearfairmarketvalueleasewithpaymentsof$1000permonthandanoption
to cancel after three years with a $9000 cancellation penalty
Explanation / Answer
Calculation of Present value of lease Payments
Present Value
Case
Monthly Payment
Years
Months
APR
Formula
Present Value
Cost of Copier
1
1150
4
48
9%
=PV(9%/12,48,-1150)
$46,212.50
$ 50,000.00
2
790
6
72
9%
=PV(9%/12,72,-790)
$43,826.71
$ 50,000.00
3
925
5
60
9%
=PV(9%/12,60,-925)
$44,560.37
$ 50,000.00
4
1000
5
60
9%
=PV(9%/12,60,-1000)
$48,173.37
$ 50,000.00
In case 4 Present value of the lease payments is arounf eaqual to the cost , hence t can be classified as Capital Lease.
In all other case , Lease is a operating lease
Calculation of Present value of lease Payments
Present Value
Case
Monthly Payment
Years
Months
APR
Formula
Present Value
Cost of Copier
1
1150
4
48
9%
=PV(9%/12,48,-1150)
$46,212.50
$ 50,000.00
2
790
6
72
9%
=PV(9%/12,72,-790)
$43,826.71
$ 50,000.00
3
925
5
60
9%
=PV(9%/12,60,-925)
$44,560.37
$ 50,000.00
4
1000
5
60
9%
=PV(9%/12,60,-1000)
$48,173.37
$ 50,000.00
In case 4 Present value of the lease payments is arounf eaqual to the cost , hence t can be classified as Capital Lease.
In all other case , Lease is a operating lease
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.