Lease Payments Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, requires payments of $25,000 at the end of each year, and contains a bargain purchase option. At the end of the lease, Montevallo has an option to pay $4,000 (which is significantly less than the estimated fair value at that time) to purchase the equipment. The equipment has a fair value at the inception of the lease of $175,000 and an estimated useful life of 20 years. The lease agreement stipulates that Folio receive a rate of return of 8% each year. Montevallo's incremental borrowing rate is 10% each year. Assume that there is no bargain purchase option and that Montevallo guarantees the $20,000 estimated residual value at the end of the 10-year lease. Montevallo estimates that it is probable that it will have to pay $15,000 cash due to the residual value guarantee. Calculate the present value of the lease payments. For interim computations, carry amounts out to two decimal places. Round your final answer to the nearest dollar. (Click here to access the PV and FV tables to use with this problem.) $169,604. X
Lease Payments Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, requires payments of $25,000 at the end of each year, and contains a bargain purchase option. At the end of the lease, Montevallo has an option to pay $4,000 (which is significantly less than the estimated fair value at that time) to purchase the equipment. The equipment has a fair value at the inception of the lease of $175,000 and an estimated useful life of 20 years. The lease agreement stipulates that Folio receive a rate of return of 8% each year. Montevallo's incremental borrowing rate is 10% each year. Assume that there is no bargain purchase option and that Montevallo guarantees the $20,000 estimated residual value at the end of the 10-year lease. Montevallo estimates that it is probable that it will have to pay $15,000 cash due to the residual value guarantee. Calculate the present value of the lease payments. For interim computations, carry amounts out to two decimal places. Round your final answer to the nearest dollar. (Click here to access the PV and FV tables to use with this problem.) $169,604. X
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Lease Payments
Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, requires payments of $25,000 at the end of each year, and
contains a bargain purchase option. At the end of the lease, Montevallo has an option to pay $4,000 (which is significantly less than the estimated fair
value at that time) to purchase the equipment. The equipment has a fair value at the inception of the lease of $175,000 and an estimated useful life of
20 years. The lease agreement stipulates that Folio receive a rate of return of 8% each year. Montevallo's incremental borrowing rate is 10% each year.
Assume that there is no bargain purchase option and that Montevallo guarantees the $20,000 estimated residual value at the end of the 10-year lease.
Montevallo estimates that it is probable that it will have to pay $15,000 cash due to the residual value guarantee.
Calculate the present value of the lease payments. For interim computations, carry amounts out to two decimal places. Round your final
answer to the nearest dollar. (Click here to access the PV and FV tables to use with this problem.)
$ 169,604.8 X
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