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ABC Leasing Company purchased specialized equipment from Hernandez Company on March 1, 2020 for $1,200,000
ABC Leasing Company purchased specialized equipment from Hernandez Company on March 1, 2020 for $1,200,000. On the same date, it leased this equipment to Nguyen Company for 5 years, the useful life of the equipment. The lease payments begin March 1, 2020 and are made every 6 months until September 1, 2024. ABC Leasing wants to earn 10% annually on its investment.
Calculate the amount of each lease payment.
Hint: Given Nguyen is going to use the equipment for its entire useful life, what should the present value of lease payments be equal to?
Expert Solution
| Cost of Equipement | $ 1,200,000.00 | Lease Amortisation Schedule | ||||||
| Lease Term | 5 Years | Date | Annual Lease Payment + BPO |
Interest on lease receivable | Recovery of lease receivable | Lease Receivable | ||
| Lease payment frequency | semi annually | 01-03-2020 | $ 1,200,000.00 | |||||
| Total Periods (t) | 5*2 = 10 | 01-03-2020 | 148005.229 | $ - | $ 148,005.23 | $ 1,051,994.77 | ||
| Rate of Interest (r) | 10% | 01-09-2020 | 148005.229 | $ 52,599.74 | $ 95,405.49 | $ 956,589.28 | ||
| I = r/frequency | 10%/2 = 0.05 | 01-03-2020 | 148005.229 | $ 47,829.46 | $ 100,175.77 | $ 856,413.51 | ||
| Annual Payments (c) | ? | 01-09-2020 | 148005.229 | $ 42,820.68 | $ 105,184.55 | $ 751,228.96 | ||
| 01-03-2020 | 148005.229 | $ 37,561.45 | $ 110,443.78 | $ 640,785.19 | ||||
| Now we know that PVAD of all lease payment is $1,200,000 | 01-09-2020 | 148005.229 | $ 32,039.26 | $ 115,965.97 | $ 524,819.22 | |||
| 01-03-2020 | 148005.229 | $ 26,240.96 | $ 121,764.27 | $ 403,054.95 | ||||
| Present Value of Annuity Due Factor: | 01-09-2020 | 148005.229 | $ 20,152.75 | $ 127,852.48 | $ 275,202.47 | |||
| PVAD = C/i * [1 - {1/(1+i)^t] * (1+i) | 01-03-2020 | 148005.229 | $ 13,760.12 | $ 134,245.11 | $ 140,957.36 | |||
| 1200000 = (C/0.05) * [1 - {1/(1.05)^10] * 1.05 | 01-09-2020 | 148005.229 | $ 7,047.87 | $ 140,957.36 | $ - | |||
| 1200000 = (C/0.05) * 0.38609 * 1.05 | ||||||||
| 1200000 = (C/0.05) * 0.40539 | ||||||||
| 1200000 = C * 8.10782 | ||||||||
| C = 1200000/8.10782 | ||||||||
| Answer | C = 148005.229 |
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