Splish Brothers Company is negotiating to lease a piece ofequipment to MTBA, Inc. MTBA...

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Splish Brothers Company is negotiating to lease a piece ofequipment to MTBA, Inc. MTBA requests that the lease be for 9years. The equipment has a useful life of 10 years. Splish Brotherswants a guarantee that the residual value of the equipment at theend of the lease is at least $4,000. MTBA agrees to guarantee aresidual value of this amount though it expects the residual valueof the equipment to be only $2,000 at the end of the leaseterm.

If the fair value of the equipment at lease commencement is$120,000, what would be the amount of the annual rental paymentsSplish Brothers demands of MTBA, assuming each payment will be madeat the beginning of each year and Splish Brothers wishes to earn arate of return on the lease of 11%? (For calculationpurposes, use 5 decimal places as displayed in the factor tableprovided and round final answer to 0 decimal places, e.g.5,275.)

Click here to view factor tables.
Amount of equal annual lease payments

Answer & Explanation Solved by verified expert

3.7 Ratings (308 Votes)

Fair Value of leased asset	1,20,000	a
Less - PV Guranteed residual Value
Residual Value	4,000	b
* PV factor (11%,9)	0.3909	c
	1,564	d = c*b
Value to be Recovered through Periodic payment	1,18,436	e = a-d
/PVAD (11%,9)(Working)	6.146	f
Annual lease payment at beginning of year	19,270	g = e/f

Working note
Year	PV Factor
1	1.000
2	0.901
3	0.812
4	0.731
5	0.659
6	0.593
7	0.535
8	0.482
9	0.434
Total	6.146

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In: AccountingSplish Brothers Company is negotiating to lease a piece ofequipment to MTBA, Inc. MTBA requests...Splish Brothers Company is negotiating to lease a piece ofequipment to MTBA, Inc. MTBA requests that the lease be for 9years. The equipment has a useful life of 10 years. Splish Brotherswants a guarantee that the residual value of the equipment at theend of the lease is at least $4,000. MTBA agrees to guarantee aresidual value of this amount though it expects the residual valueof the equipment to be only $2,000 at the end of the leaseterm.If the fair value of the equipment at lease commencement is$120,000, what would be the amount of the annual rental paymentsSplish Brothers demands of MTBA, assuming each payment will be madeat the beginning of each year and Splish Brothers wishes to earn arate of return on the lease of 11%? (For calculationpurposes, use 5 decimal places as displayed in the factor tableprovided and round final answer to 0 decimal places, e.g.5,275.)Click here to view factor tables.Amount of equal annual lease payments