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Finozest Solutions Limited (Finozest) is involved in transporting commodities from Lilongwe to Lusaka. The company...

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Accounting

Finozest Solutions Limited (Finozest) is involved in transporting commodities from Lilongwe to Lusaka. The company is required to replace its trucks regularly owing to the importance of providing a reliable service to customers. The company is considering investing in a new truck at a cost of K1.2 million. Finozests bank has indicated that it can offer the company a finance lease with payments of K292,510.00, payable annually in arrears for five years. There is no residual payment or value. Kindly ignore taxation.

Required: 1. What is the interest rate implicit in the finance lease?

2. Assume that the bank wishes to keep the lease payment at K292,510.00 but requires that the annual payments are payable in advance.

How does this change the interest rate implicit in the lease?

3. Assume that the truck has an expected residual value of K450,000 at the end of five years and the bank takes this residual value into account in setting the lease payments, which are payable annually in advance. How would this change your lease payment?

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