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Your client, Keith Grouper Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 26 years
Your client, Keith Grouper Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 26 years. Grouper has an investment cost of $428,000 in the machine, which has a useful life of 26 years and no salvage value at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 26 equal rental payments at the end of each of the next 26 years.
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You are requested to provide Grouper with the amount of each of the 26 rental payments that will yield an 11% return on investment. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Amount of each rental payments$
Expert Solution
Computation of Amount of Each Rental Payment using PMT Function in Excel:
=pmt(rate,nper,-pv,fv)
Here,
PMT = Amount of Each Rental Payment = ?
Rate = 11%
Nper = 26
PV = $428,000
FV = 0
Substituting the values in formula:
=pmt(11%,26,-428000,0)
PMT or Amount of Each Rental Payment = $50,423.78
Or we calculate it as follows:
Amount of Each Rental Payment = Investment Cost/(PVA26, 11%)
Here,
Investment Cost = $428,000
PVA26, 11% or Present Value Factor at 11% for 26 years = 7.9844
Present Value Factor at 12% for 28 years as per annuity chart is 8.48806
Amount of Each Rental Payment = $428,000/8.48806 = $50,423.78
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