Asked by Billy Yeung on Jun 26, 2024
Verified
The Rogers Leasing Company signed an agreement to lease an asset that has a fair value of $800, 000 on December 31, 2010.The lease will be paid in seven equal annual payments of $138, 730, beginning on December 31, 2010.The interest rate included in the lease agreement is
A) 8%
B) 7%
C) 6%
D) 5%
Interest Rate
The rate at which a borrower pays interest for borrowing money from a lender.
Equal Annual Payments
Payments made in uniform amounts each year, typically used in amortization of loans or in annuities.
- Determine financial obligations for loans and leases by applying the time value of money concepts.
Verified Answer
FU
Faisal UllahJun 29, 2024
Final Answer :
B
Explanation :
We can use the present value formula to calculate the interest rate included in the lease agreement.
PV of lease payments = Lease payments * [1 - 1/(1+r)^n] / r,
where r is the interest rate and n is the number of periods.
Plugging in the known values, we get:
$800,000 = $138,730 * [1 - 1/(1+r)^7] / r
Solving for r, we get:
r = 7%
Therefore, the interest rate included in the lease agreement is 7%. So, the correct answer is B.
PV of lease payments = Lease payments * [1 - 1/(1+r)^n] / r,
where r is the interest rate and n is the number of periods.
Plugging in the known values, we get:
$800,000 = $138,730 * [1 - 1/(1+r)^7] / r
Solving for r, we get:
r = 7%
Therefore, the interest rate included in the lease agreement is 7%. So, the correct answer is B.
Learning Objectives
- Determine financial obligations for loans and leases by applying the time value of money concepts.
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