Question:
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 an 8% annual interest rate.
Required:
1. Determine the required lease payment if the lease agreement calls for 10 equal annual payments
beginning immediately.
2. Determine the required lease payment if the first of 10 annual payments will be made one year from the
date of the agreement.
3. Determine the required lease payment if the first of 10 annual payments will be made immediately and
Benning will be able to sell the machine to another customer for $50,000 at the end of the 10-year lease.
Answer:
Requirement 1
PVAD = Annuity amount x Annuity factor
Annuity amount =
Annuity amount = $800,000
7.24689
Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)
Annuity amount = $110,392 = Lease payment
Requirement 2
Annuity amount = $800,000
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 an 8% annual interest rate.
Required:
1. Determine the required lease payment if the lease agreement calls for 10 equal annual payments
beginning immediately.
2. Determine the required lease payment if the first of 10 annual payments will be made one year from the
date of the agreement.
3. Determine the required lease payment if the first of 10 annual payments will be made immediately and
Benning will be able to sell the machine to another customer for $50,000 at the end of the 10-year lease.
Answer:
Requirement 1
PVAD = Annuity amount x Annuity factor
Annuity amount =
Annuity amount = $800,000
7.24689
Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)
Annuity amount = $110,392 = Lease payment
Requirement 2
Annuity amount = $800,000
