The Deluxe Corporation has just signed a 168-month lease on an asset with a 19-y

Question

The Deluxe Corporation has just signed a 168-month lease on an asset with a 19-year life. The minimum lease payments are $2,400 per month ($28,800 per year) and are to be discounted back to the present at a 10 percent annual discount rate. The estimated fair value of the property is $220,000. Use Appendix D http://lectures.mhhe.com/connect/0077861612/Appendix_D.jpg for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.

Calculate the lease period as a percentage to the estimated life of the leased property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Calculate the present value of lease payments as a percentage to the fair value of the property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

The Deluxe Corporation has just signed a 168-month lease on an asset with a 19-year life. The minimum lease payments are $2,400 per month ($28,800 per year) and are to be discounted back to the present at a 10 percent annual discount rate. The estimated fair value of the property is $220,000. Use Appendix D http://lectures.mhhe.com/connect/0077861612/Appendix_D.jpg for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.

Explanation / Answer

1)Lease period percentage = Lease period/Estimated life of the leased property
= 168 months/19*12
           =73.68%

2)Present value of the lease payments of $2,400 per month for 168 months at an annual rate of 10% which comes to 10%/12 per month is $216,566.88

and present value of lease payments as a percentage to the fair value of the property
= $216,566.88/220000
=98.44%

3) Capital lease since the net present value of all the rent payments equals 90 percent of more of the asset's market value

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