Ace Leasing acquires equipment and leases it to customers under long-term sales-

Question

Ace Leasing acquires equipment and leases it to customers under long-term sales-type leases. Ace earns interest under these arrangements at a 6% annual rate. Ace leased a machine it purchased for $690,000 under an arrangement that specified annual payments beginning at the commencement of the lease for five years. The lessee had the option to purchase the machine at the end of the lease term for $200,000 when it was expected to have a residual value of $250,000. (FV of $1, PV of $1, FVA of $1, PVA of $1 FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Calculate the amount of the annual lease payments Purchase Option Table or calculator function: ns Present Value Amount to be recovered (fair value) Purchase option Amount to be recovered through periodic lease payments Lease Payment Table or calculator function: Lease Payments Amount of fair value recovered each lease payment

Explanation / Answer

SOLUTION

n=5 years

i=6%

Particulars Amount ($) Amount to be recovered (Fair value) 690,000 Less: Present value of the exercise price ($200,000*0.74726) (149,452) Amount to be recovered through periodic lease payments 540,548 Present value of annuity due (n=5,i=6%) 4.46511 Lease payments at the beginning of each of the next 5 years 121,060

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