Kingbird Company leases an automobile with a fair value of $15,671 from John Sim
ID: 2567383 • Letter: K
Question
Kingbird Company leases an automobile with a fair value of $15,671 from John Simon Motors, Inc., on the following terms:
Suppose that instead of $1,500, Kingbird expects the residual value to be only $500 (the guaranteed amount is still $1,500). How does the calculation of the present value of the lease payments change from part (b)? (Round answer to 0 decimal places, e.g. 5,275.) PV of lease payments $Entry field with incorrect answer 1169
1. Non-cancelable term of 50 months. 2. Rental of $320 per month (at the beginning of each month). (The present value at 0.5% per month is $14,197.) 3. Kingbird guarantees a residual value of $1,500 (the present value at 0.5% per month is $1,169). Delaney expects the probable residual value to be $1,500 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Kingbird’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.Explanation / Answer
The present value of lease payments will be;
= Present value of rental + Present value of residual value
= 14197+390
= 14587
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