The Hardaway Corporation plans to lease a $900,000 asset to the O’Neil Corporati

Question

The Hardaway Corporation plans to lease a $900,000 asset to the O’Neil Corporation. The lease will be for 16 years. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

If the Hardaway Corporation desires a return of 12 percent on its investment, how much should the lease payments be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $900,000 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 12 percent on the 16-year lease. (Do not round intermediate calculations and round your answer to 2 decimal places.)

The Hardaway Corporation plans to lease a $900,000 asset to the O’Neil Corporation. The lease will be for 16 years. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Explanation / Answer

a) Here the Present Value = $900,000. No. of Payments (Periods) = 16 Years, Return Required = 12%

Therefore, using excel or financial calculator, enter the above componenets to get Annuity of $129,051.02

b) New Present Value after 10% deduction = 900,000 * (100%-10%) = 900,000*90% = $810,000

Again using excel, Revised Lease Payment = $116,145.91

On Excel, use the PMT Function

The Syntax of PMT function is PMT (rate, nper, pv, (fv), type)

In a) use the following values PMT (12%, 16, 900000, 0)

The value will come to be -129,051.02. Remember this value will always be the opposit sign since it is the inflow while initial lease amount was outflow.

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