Splish Brothers Company is negotiating to lease a piece of equipment to MTBA, In

Question

Splish Brothers 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. Splish Brothers 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 $2,000 at the end of the lease term.

If the fair value of the equipment at lease commencement is $115,000, what would be the amount of the annual rental payments Splish Brothers demands of MTBA, assuming each payment will be made at the beginning of each year and Splish Brothers wishes to earn a rate of return on the lease of 6%? (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.)

Explanation / Answer

Note :Computation of money factor- Divide interest rate by 2400. This is the common factor used by professionals.

Sr No Particulars Amount ($) 1 Fair Value                         115,000 2 Interest Rate (Money Factor) [Int rate/2400*100] 0.0025 3 Lease Term 9 yrs or 108 months 4 Residual Value                              4,000 5 Worth of equipment (1-4)                         111,000 6 Monthly payment before interest (5/3)                              1,028 7 Monthly interest cost [(1+4)*2]                                 298 8 Total Monthly lease payment                              1,325 9 Annual Lease payment (8*12 months)                           15,903

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