On January 1, 2016, the Millwork Company signed a four-year non-cancelable lease of equipment from the Midford Company. The annual lease payments of $35,000 are to be paid on January 1 of each year. The first payment is due on January 1, 2016. The lease contains a bargain purchase option price of $15,000. The equipment's fair value is expected to be $30,000 on December 31, 2019. The estimated economic life of the equipment is six years, and the estimated residual value at the end of six years is $5,000. Millwork's incremental borrowing rate is 12%, and the implicit interest rate used in the lease agreement is 10%, which is known by Millwork. Present value factors for interest rates of 10% and 12% are as follows: 10% 12% Present value of $1 for n = 1 0.90909 0.89286 Present value of $1 for n = 4 0.68301 0.63552 Present value of an ordinary annuity for n = 4 3.16987 3.03735
On January 1, 2016, the Millwork Company signed a four-year non-cancelable lease of equipment from the Midford Company. The annual lease payments of $35,000 are to be paid on January 1 of each year. The first payment is due on January 1, 2016. The lease contains a bargain purchase option price of $15,000. The equipment's fair value is expected to be $30,000 on December 31, 2019. The estimated economic life of the equipment is six years, and the estimated residual value at the end of six years is $5,000. Millwork's incremental borrowing rate is 12%, and the implicit interest rate used in the lease agreement is 10%, which is known by Millwork.
Present value factors for interest rates of 10% and 12% are as follows:
|
|
10% |
12% |
|
Present value of $1 for n = 1 |
0.90909 |
0.89286 |
|
Present value of $1 for n = 4 |
0.68301 |
0.63552 |
|
Present value of an ordinary annuity for n = 4 |
3.16987 |
3.03735 |
|
Present value of an annuity due for n = 4 |
3.48685 |
3.40183 |
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