On January 1, Smith Industries leased equipment to a customer for a four-year pe
ID: 2511958 • Letter: O
Question
On January 1, Smith Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to Smith. The equipment cost Smith $350,000 and has an expected useful life of six years. Its normal sales price is $350,000. The residual value after four years is $50,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 5%. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar amount.)
The present value of $1: n=4, i=5% is 0.82270.
The present value of an ordinary annuity of $1: n=4, i=5% is 3.54595.
The present value of an annuity due of $1: n=4, i=5% is 3.72325.
Multiple Choice
$87,104
$82,955
$98,704
$77,337
Explanation / Answer
Present value of residual value=50000*0.82270= $41135 Amount of the annual lease payments=(350000-41135)/3.54595= $87104 Option 1 is correct