1. After starting your new job with a $55,000 salary, you thought it logical to
ID: 2405041 • Letter: 1
Question
1. After starting your new job with a $55,000 salary, you thought it logical to get a new Range Rover. The particular model you desire has a suggested retail price (ie. “MSRP") of $101,495, but you have been able to negotiate a fair selling price of $96,887 (please don't ever pay full MSRP!) Unfortunately, you don't have $96,887 in cash. The salesman instead suggests that you lease the vehicle from Range Rover for 33 months. He specifically offers a lease in which you make a down payment of $4,900 and then pay $1,076 month at the beginning of each month for 33 months (thus, you pay $5,976 at lease inception, including the first month's lease payment). At the end of the 33 months, you return the vehicle to Range Rover. However, you do have the option to purchase the vehicle at the end of the lease for $63,942, which is its estimated resale value at that point in time Based on the information given, calculate the implicit annual interest rate used by Range Rover in the lease offer. Round your rate to two decimals (example-6.47%) a. b. As the lessee, would you classify the lease as a finance or operating lease? 2. On 1/1/16, Hobbit Sports started leasing retail space at a new strip center in Backswamp, LA. The lease term is 10 years and the lease requires Hobbit to pay annual rent to the lessor at the beginning of each year, starting on 1/1/16. However as an incentive to persuade Hobbit to lease the space, the rent for the first two years has been reduced - i.e. for years 1 and 2, Hobbit only pays $25,000 /year, but then pays $52,000/ year for the remaining 8 years. At the end of 2025, Hobbit will vacate the space. The lease provides for no renewals nor options to purchase. There are no other payments required in the lease. Hobbit does not know the lessor's implicit rate in the lease, but estimates its own incremental borrowing rate at 6%. Assume that all lease payments are literally made on their l/l due date and that Hobbit uses the straight-line method for depreciating its assets. Assuming this is an operating lease a. 1. 2. What is the total amount of expense for 2017? What is the ROU asset (net of any amortization) at 12/31/17? b. Assuming this is a finance lease 1. 2. What is the total amount of expense for 2017? What is the ROU asset (net of any amortization) at 12/31/17?Explanation / Answer
1) Present Value = $96,887 - $4900 $91,987.00 Period 33 Monthly Payment $1,076.00 Future Value $63,942.00 Type $1.00 Rate = Rate(33,1076,-91987,63942,1) 0.29% Annual Implicit Rate = 0.29% x 12 3.50% Its a capital lease because its satisfied one condition Bargain purchase option -The lessee can buy the asset from the lessor at the end of the lease term for a below-market price.
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