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Eliza Ltd decided to lease from Ford Ltd a car that had a fair value at 30 June 2020 of $38,960
Eliza Ltd decided to lease from Ford Ltd a car that had a fair value at 30 June 2020 of $38,960. The lease agreement contained the following provisions. Lease term 3 years Annual rental payments (commencing 30/6/20) $10,000 Guaranteed residual value (expected fair value at end of lease term) $12,000 The expected useful life of the vehicle is 5 years. The interest rate implicit in the lease is 8%. What is the present value of the Lease Liability? (round your answer to the nearest dollar if necessary). $35,297 $37,359 $38,121 O None of the above
Expert Solution
| Year (n) | Cash flows | Cash flows description | Interest rate (p.a) | Present value formula | Present Value | |
| 1 | $ 10,000.00 | Annual rental payments (as given) | 8% | = Cash flow/(1+r)^n | =10000/(1.08)^1 = | $ 9,259 |
| 2 | $ 10,000.00 | Annual rental payments (as given) | 8% | = Cash flow/(1+r)^n | =10000/(1.08)^2 = | $ 8,573 |
| 3 | $ 10,000.00 | Annual rental payments (as given) | 8% | = Cash flow/(1+r)^n | =10000/(1.08)^3 = | $ 7,938 |
| 3 | $ 12,000.00 | Guaranteed Residual Value (as given) | 8% | = Cash flow/(1+r)^n | =12000/(1.08)^3 = | $ 9,526 |
| Sum of all present values | $ 35,297 | |||||
| Present value of the lease liability is $35,297 as calculated above and hence option A is right, the other options are incorrect. |
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