Haystack, Inc. manufactures machinery used in the mining industry. On January 2,

Question

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. If the selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, what are the equal annual payments?

a. $175,820

b. $162,795

c. $181,972

d. $195,356

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Explanation / Answer

Answer : a. $175,820

Explanation :

Equal annual payments = Selling price of the equipment * (100- Down payment % ) / PVIFA8%,5 yrs

= $780,000 * (100- 10%) / 3.99271

= $175,820

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