The Deluxe Corporation has just signed a 156-month lease on an asset with a 18-y
ID: 2744753 • Letter: T
Question
The Deluxe Corporation has just signed a 156-month lease on an asset with a 18-year life. The minimum lease payments are $2,300 per month ($27,600 per year) and are to be discounted back to the present at a 12 percent annual discount rate. The estimated fair value of the property is $215,000. Calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.
a.
Calculate the lease period as a percentage to the estimated life of the leased property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Lease period percentage
%
b.
Calculate the present value of lease payments as a percentage to the fair value of the property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
PV of lease payment percentage
%
The Deluxe Corporation has just signed a 156-month lease on an asset with a 18-year life. The minimum lease payments are $2,300 per month ($27,600 per year) and are to be discounted back to the present at a 12 percent annual discount rate. The estimated fair value of the property is $215,000. Calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.
Explanation / Answer
a. lease period = 156 months or 13 years
estimated life of the asset = 18 years
Thus lease period as a % to the estimated life of the leased property = lease period/estimated life of the leased property
= 13/18
= 72.22%
b. Annual lease payments = $27,600. discount rate = 12% and n = 13 years (lease period)
Thus present value of lease payments = annual lease payments*PVIFA (n=13, i = 12)
= 27,600*6.4235
= $177,289.9363
Fair value = 215,000
Thus PV of lease payament % = PV of lease payments/fair value
= 177,289.9363/215,000
= 82.46%
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