Problem 16-20 Capital lease or operating lease [LO4] The Deluxe Corporation has
ID: 2651495 • Letter: P
Question
Problem 16-20 Capital lease or operating lease [LO4]
The Deluxe Corporation has just signed a 156-month lease on an asset with a 18-year life. The minimum lease payments are $1,200 per month ($14,400 per year) and are to be discounted back to the present at a 8 percent annual discount rate. The estimated fair value of the property is $160,000. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.
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.)
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.)
The Deluxe Corporation has just signed a 156-month lease on an asset with a 18-year life. The minimum lease payments are $1,200 per month ($14,400 per year) and are to be discounted back to the present at a 8 percent annual discount rate. The estimated fair value of the property is $160,000. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.
Explanation / Answer
Answer:b PV of lease payment:
=$1200[1-(1/(1.0066666)156)]/0.0066667
=$116157.95
Answer: c This amount represents 72.60% of the fair value of the property.Therefore the PV of lease payments is lesser than 90% of the fair value of the property.so lease is operating lease.