Denis Leasing Company recently leased machinery to Banks Building Associates. Th

Question

Denis Leasing Company recently leased machinery to Banks Building Associates. The five-year lease contract requires minimum rental payments of $20,000 at the beginning of each year. The lease is classified as a capital lease. The 9% implicit rate on the lease is known to Banks Building Associates. There is a $5,000 guaranteed residual value. ? (Click the icon to view the Future Value of $1 (Click the icon to view the Present Value of $1 table.) table E Cliok the loon to view the Future Value of an Ordinary (Click the icon to view the Present Value of an Ordinary Annuity table.) Annuity table.) E (Click the icon to view the Future Value of an Annuity Due Click the icon to view the Present Value of an Annuity Due table.) Compute the present value of the minimum lease payments for Denis Leasing Company and Banks Building. (Use the present value and future value tables, the formula method, a financial calculator, or a spreadsheet for your calculation. If using present and future value tables or the formula method, use factor amounts rounded to five decimal places, xxxxxx, Round your final answer to the nearest whole dollar.) The present value (PV) of the minimum lease payments for Denis Leasing Company and Banks Building Associates is

Explanation / Answer

The present value of minimum lease payments for Denis leasing company and Banks Building Associates:

$20000[1/1]+$20000[1/1.09]+$20000[1/(1.09×1.09)]+$20000[1/(1.09×1.09×1.09)]+$20000[1/(1.09×1.09×1.09×1.09)]+$5000[1/(1.09×1.09×1.09×1.09×1.09)]

=$84794.4+$3249.66=$88044.06

Explaination of the formula:Here for year to year the Value of lease payments decline by 9% and hence for every year it is shown the value declining by 9% and indicated as (1/1.09) which represents [100%/(100%+9%)] and further declines every year.How ever there is no decline for first installment as it is paid at beginning of the year and Guaranteed residual value further declines as it is the value at the end of 5th year

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