Question 28 Larkspur Limited has signed a lease agreement with Lantus Corp. to l

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Question 28 Larkspur Limited has signed a lease agreement with Lantus Corp. to lease equipment with an expected lifespan of eight years, no estimated salvage value, and a cost to Lantus of $170,000. The terms of the lease are as follows: The lease term begins on January 1, 2016, and runs for 5 years. The lease requires payments of $43,973 at the beginning of each year starting January 1, 2016 which includes $5,900 for maintenance and insurance costs. At the end of the lease term, the equipment is to be returned to the lessor. Lantus, implied interest rate is 6%, while Larkspur's borrowing rate is 7%. Larkspur uses straight-line depreciation for similar equipment. The year-end for both companies is December 31 Assuming that both companies follow ASPE Click here to view the factor table Determine the present value of the minimum lease payments. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.) Present Value$ By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor. Attempts: 0 of 1 usedSAVE FOR LATER SUBMIT ANSWER

Explanation / Answer

Solution :

Annual lease payment at beginning of each year = $43,973

Maintenance and insurance cost = $5,900

Net annual lease payment = $43,973 - $5,900 = $38,073

Discount rate to be used for computing present value of minimum lease payment = 6%

It is assumed that Larksput limited is aware about Lantus corp. implied interest rate.

Present value of minimum lease payments = $38,073 * Cumulative PV factor for annuity due at 6% for 5 periods

= $38,073 * 4.465106 = $170,000

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