Sugar Co leased a machine from Spice Co. The terms of the lease are as follows:
Inception of lease 1 January 20X1
Lease term 4 years at $78,864 per annum payable in arrears
Present value of future lease payments $250,000
Useful life of asset 4 years
required : calc the interest rate implicit in the lease using the table below
the table shows the cumulative present value of $1 per annum, receivable or payable at the end of each year for n years
years 6% 8% 10%
1 0.943 0.926 .909
2 1.833 1.783 1.736
3 2.673 2.577 2.487
4 3.465 3.312 3.170
5 4.212 3.993 3.791
the answer for this question goes
PV = annuity x cumulative discount factor (CDF)
i.e. :
250000 = 78864 x CDF
CDF = 250000/78864 = 3.170 so 10%
my doubt is when using this formula doesnt it have to be like with like (one year figures)? how are we using the present value of all the lease payments (4yrs) and equating it to the payment for one single year,? i tried doing that and im not getting a value in the table
is it because we only have the PV of payment of all 4 yrs therefore we are forced to make do with it ?
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