Ace Leasing acquires equipment and leases it to customers under long-term direct

Question

Ace Leasing acquires equipment and leases it to customers under long-term direct financing leases. Ace earns interest under these arrangements at a 6% annual rate. Ace leased a machine it purchased for $650,000 under an arrangement that specified annual payments beginning at the inception of the lease for six years. The lessee had the option to purchase the machine at the end of the lease term for $150,000 when it was expected to have a residual value of $210,000. (FV of $1, PV of $1, FVA of $1, PVA of $1,FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Calculate the amount of the annual lease payments.

Amount to be recovered $_________

Bargain Purchase Option $_________

Amount to be recovered through periodic lease payments $______________

Lease Payment:

Amount of fair value recovered each lease payment $_________

Ace Leasing acquires equipment and leases it to customers under long-term direct financing leases. Ace earns interest under these arrangements at a 6% annual rate. Ace leased a machine it purchased for $650,000 under an arrangement that specified annual payments beginning at the inception of the lease for six years. The lessee had the option to purchase the machine at the end of the lease term for $150,000 when it was expected to have a residual value of $210,000. (FV of $1, PV of $1, FVA of $1, PVA of $1,FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Calculate the amount of the annual lease payments.

Amount to be recovered $_________

Bargain Purchase Option $_________

Amount to be recovered through periodic lease payments $______________

Lease Payment:

Amount of fair value recovered each lease payment $_________

Explanation / Answer

Solution:

Amount to be recovered = $650,000

Present value of bargain purchase option = $150,000 * PV factor at 6% for 6th period

= $150,000 * 0.704961 = $105,744

Amount to be recoverd through periodic lease payment = $650,000 - $105,744 = $544,256

Annual lease payment = $544,256 / Cumulative PV factor for annuity due at 6% for 6 periods

= $544,256 / 5.212364

= $104,416

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