Ivanhoe Leasing Company agrees to lease equipment to Shamrock Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $517,000, and the fair value of the asset on January 1, 2020, is $657,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Shamrock estimates that the expected residual value at the end of the lease term will be 55,000. Shamrock amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Ivanhoe desires a 10% rate of return on its investments. Shamrock’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31.)

Ivanhoe Leasing Company agrees to lease equipment to Shamrock Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $517,000, and the fair value of the asset on January 1, 2020, is $657,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Shamrock estimates that the expected residual value at the end of the lease term will be 55,000. Shamrock amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Ivanhoe desires a 10% rate of return on its investments. Shamrock’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31.)

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter4A: Nopat Breakeven: Revenues Needed To Cover Total Operating Costs

Section: Chapter Questions

Problem 1DQ

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1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $517,000, and the fair value of the asset on January 1, 2020, is $657,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Shamrock estimates that the expected residual value at the end of the lease term will be 55,000. Shamrock amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		The collectibility of the lease payments is probable.
6.		Ivanhoe desires a 10% rate of return on its investments. Shamrock’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.