Tamarisk Company is negotiating to lease a piece of equipment to MTBA, Inc. MTBA

Question

Tamarisk Company is negotiating to lease a piece of equipment to MTBA, Inc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Tamarisk wants a guarantee that the residual value of the equipment at the end of the lease is at least $4,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only $2,500 at the end of the lease term.

If the fair value of the equipment at lease commencement is $125,000, what would be the amount of the annual rental payments Tamarisk demands of MTBA, assuming each payment will be made at the beginning of each year and Tamarisk wishes to earn a rate of return on the lease of 12%? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275.)

Amount of equal annual lease payments = $?????

Explanation / Answer

Fair value = [PVAD 12%,9 * Annual payment]+ [PVF 12%,9 *Guaranteed residual value]

125000 = [5.96764* A] + [.36061*4000]

125000 = 5.96764 A + 1442.44

125000-1442.44 = 5.96764 A

   A = 123557.56/5.96764

     = $ 20705

Annual payment = 20705

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