On January 1, James Industries leased equipment to a customer for a six-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $890,000 and has an expected useful life of eight years. Its normal sales price is $890,000. The residual value after six years is $200,000. 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 8%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Calculate the amount of the annual lease payments. (Enter amounts as positive values rounded to the nearest whole dollar.)

James Industries

The amount of the annual lease payments is:

= $149,258.

Explanation:

a) Data and Calculations:

Cost of equipment = $890,000

Residual value = $200,000

Net value = $690,000

Estimated useful life = 8 years

Lease period = 6 years

Lease Liability = $895,545.70

From an online financial calculator:

Annual PMT = $149,257.62

Sum of all periodic payments$895,545.70

Total Interest$205,545.70

Schedule of Lease Annual Payments:

Period     PV                  PMT            Interest              FV

1$690,000.00$-149,257.62$55,200.00$-595,942.38

2$595,942.38$-149,257.62$47,675.39$-494,360.16

3$494,360.16$-149,257.62$39,548.81$-384,651.35

4$384,651.35$-149,257.62$30,772.11$-266,165.85

5$266,165.85$-149,257.62$21,293.27$-138,201.50

6$138,201.50$-149,257.62$11,056.12$0.00

c.

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