Each of the independent sitations below describes a finance lease in which annua

Question

Each of the independent sitations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate.

For each situation determine the amount of the annual lease paymeent, as calculated by the lessor. Round answer to nearest whole dollar.

Situation 1 - Lessee 2 - Lessor Lease Term 10 years 20 years Lessor's desired rate of return 10% 12% Lessee's incremental borrowing rate 12% 10% Fair value        900,000        600,000

Explanation / Answer

Amount of the annual lease payment = Fair value / PVIFA  Lease Term , Lessor's desired rate

Situation 1

= $900,000 / PVIFA 10 years , 10%  = $900,000 / 6.1446 = $146,470

Situation 2

= $600,000 / PVIFA 20 years , 12% = $600,000 / 7.4694 = $80,328

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