Pepper. Int. agrees to lease equipment from the Blue Corporation for 10 years at

Question

Pepper. Int. agrees to lease equipment from the Blue Corporation for 10 years at $25.000 a: the end of each year The equipment hat a (air value of $175.000 and an estimated useful life of 10 years The lease includes a guaranteed residua value of $10.000. Inudditvon to the lease pa>ments. Pepper will pay $5.000 per year for a maintenance agreement Pepper can finance this lease with its bank at a 12% rate The Jessy's implicit lease rate, known to the lessee, is 10% Round all calculations to the nearest whole dollar amount. Present value interest factors are: The liability will be valued on Pepper's balance sheet at. Select one: $144.475. $157.469 $175.000. $250.000.

Explanation / Answer

Lease liability will be lesser of Asset   Fair Value or PV of Annual lease payments For PV of annual lease payments lesser of lessee's borrowing cost or lessor's implicit rate will be used. So here discount rate will be 10% Annual Lease Payment                     25,000 Annuity factor for 10 years @10%                 6.14457 PV of lease payments =                 153,614 Guaranteed residual value                     10,000 PVIF factor @10% for 10 years                 0.38554 PV of residual value                     3,855 Total PV =                 157,470 Lesser of Asset value & PV is The PV So Option is b. $157469 approx

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