The Herbertson Company leases machines to clients. Annual rentals are paid each year, with the first payment due on the day the lease begins. A machine with a book value of $12,000 is leased. Unguaranteed salvage value is $1,500. Lease term is six years. Herbertson's interest rate is 5%. What is the approximate annual lease payment? "Coursehero"

$2,251.63

Explanation:

Calculation for the approximate annual lease payment

Since we looking for the approximate annual lease payment this means that our annual lease payment will be x and since the interest rate is 5% and we were been told that the first payment occured at the beginning of lease in which balance of 5 payments at the end of each year which means that we would find the PVA factors of (5%,5)

Hence,

x + x × Present value annuity factor (5%,5)

= $12,000

x + x(5.3295) = $12,000

5.3295x = $12,000

Now let divide the PVA of 5.3295 by $12,000 in order to get the approximate annual lease payment

x = $12,000 / 5.3295

x = $2,251.63

Therefore the approximate annual lease payment will be $2,251.63

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