Benning Manufacturing Company is negotiating with a customer for the lease of a

Question

Benning Manufacturing Company is negotiating with a customer for the lease of a large machine manufactured by Benning. The machine has a cash price of $940,000. Benning wants to be reimbursed for financing the machine at a 9% annual interest rate. (FV of $1. PV of S1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of S'H (Use appropriate factor(s) from the tables provided.) Required: Determine the required lease payment if the lease agreement calls for 15 equal annual payments beginning immediately. Determine the required lease payment if the first of 15 annual payments will be made one year from the date of the agreement. Determine the required lease payment if the first of 15 annual payments will be made immediately and Benning will be able to sell the machine to another customer for S64.000 at the end of the 15-year lease. Lease payment

Explanation / Answer

cash price = $940,000

i = 9%

Excel function : PMT(Rate,No of periods,PV,FV,type of annuity)

1) n = 15

annual payments beginning immediately - this is an annuity due

lease payment = PMT(0.09,15,940000,,1) = $106,986.56

2) n = 15

annual payments beginning at the end of first year - this is an ordinary annuity

lease payment = PMT(0.09,14,940000,,0) = $116,615.35

3) FV = 64,000

lease payment = PMT(0.09,15,940000,64000,1) = $104,986.77

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