Exercise 21-1 (Part Level Submission) On January 1, 2017, Waterway Corporation s

Question

Exercise 21-1 (Part Level Submission) On January 1, 2017, Waterway Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Waterway to make annual payments of $7,909 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $4,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term, waterway uses the straight-line method of depreciation for all of its plant assets. waterway's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown. ? (b) Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to O decimal places e.g 58,971.) The present value of the minimum lease payments

Explanation / Answer

SOLUTION

Annual payment = $7,909

Present value of an annuity due of 1 for 5 periods at 11% =  4.10245

Present value of the minimum lease payments = $7,909 * 4.10245

= $32,446

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