Compute the present value of the minimum lease payments
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On January 1, 2017, Metlock Corporation signed a 3-year noncancelable lease for several computers. The terms of the lease called for Metlock to make annual payments of $4,500 at the beginning of each year, starting January 1, 2017. The computers have an estimated useful life of 3 years and a $480 unguaranteed residual value. The computers revert back to the lessor at the end of the lease term. Metlock uses the straight-line method of depreciation for all of its property, plant, and equipment. Metlock’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.
(a)
Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
| Present Value | $enter the Present Value in dollars |
Expert Solution
Step 1
Present value of the lease payments means that value of the lease payments which the lessee is paying to the lessor as per lease terms and tenure are discounted at the discount rate and by way of that the present value of the lease payments are determined.
Given in the question:
On January 1, 2017, Metlock Corporation signed a 3-year non-cancelable lease
Annual Lease Payment = $4,500
Lease Payment date = Each Year at January 1 and the first payment is made on January 1, 2017
Metlock’s incremental borrowing rate is 11%
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