Summary Business Accounting

Question:

(This is a variation Problem 6–11 focusing on compounding periods of varying length.)

Benning Manufacturing Company is negotiating with a customer for the lease of a large machine

manufactured by Benning. The machine has a cash price of $800,000. Benning wants to be reimbursed

for financing the machine at a 12% annual interest rate over the five-year lease term.

Required:

1. Determine the required lease payment if the lease agreement calls for 10 equal semiannual payments

beginning six months from the date of the agreement.

2. Determine the required lease payment if the lease agreement calls for 20 equal quarterly payments

beginning immediately.

3. Determine the required lease payment if the lease agreement calls for 60 equal monthly payments

beginning one month from the date of the agreement. The present value of an ordinary annuity factor for

n = 60 and i = 1% is 44.9550.



Answer:



Requirement 1

PVA = Annuity amount x Annuity factor



Annuity amount =



Annuity amount = $800,000

7.36009

Present value of an ordinary annuity of $1: n = 10, i = 6% (from Table 4)



Annuity amount = $108,694 = Lease payment