The Hardaway Corporation plans to lease a $710,000 asset to the O’Neil Corporati

Question

The Hardaway Corporation plans to lease a $710,000 asset to the O’Neil Corporation. The lease will be for 12 years. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. If the Hardaway Corporation desires a return of 13 percent on its investment, how much should the lease payments be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

lease payment:____

b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $710,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a return of 13 percent on the 12-year lease. (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

Revised lease payment:_____

Explanation / Answer

1. Present value of asset = Lease payments * (1 - ( 1+r)-n)/r
710,000 = Lease payments * 5.91764701
Lease payments = 710,000/5.91764701 = 119980.12

2. After 10% deduction the PV of assets = 710000 * ( 1 - 10%) = 639,000
Present value of asset = Lease payments * (1 - ( 1+r)-n)/r
639,000 = Lease payments * 5.91764701
Revised Lease payments = 639,000/5.91764701 = 107982.11

Best of Luck. God Bless

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