The following Riverbed Leasing Company agrees to lease equipment to Marin Corpor
ID: 2436388 • Letter: T
Question
The following Riverbed Leasing Company agrees to lease equipment to Marin Corporation on January 1, 2017. information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $573,000, and the fair value of the asset on January 1, 2017, is $642,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $98,000. Marin estimates that the expected residual value at the end of the lease term will be 98,000. Marin amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017. 5. The collectibility of the lease payments is probable 6 Riverbed desires a 10% rate of return on its investments. Marin's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown. (Assume the accounting period ends on December 31.)Explanation / Answer
We are concerned at the real cost of the asset based on its fair value thus the initial cost of investment will be $642,000
Secondly for residual purpose we will assume the guaranteed value of asset of $98,000
So net we have a 2 cash flows:
To arrive at value of the lease at the start we need to arrive at the PV of both the cash flows:
= PV (1+Cost%)^time (for both)
= -$642,000 + 98,000 (1+10%)^7
=-$591,711