Elston Company has entered into a lease agreement for office equipment which could be purchased for $39,927. Elston Company has, however, chosen to lease the equipment for $10,000 per year, payable at the end of each of the next 5 years. Calculate the implied interest rate for the lease payments.

Question

Business

Lydia Osborne

13 November, 04:56

Elston Company has entered into a lease agreement for office equipment which could be purchased for $39,927. Elston Company has, however, chosen to lease the equipment for $10,000 per year, payable at the end of each of the next 5 years. Calculate the implied interest rate for the lease payments.

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Answers (1)

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Goblin · Answer 1

The implied interest rate for the lease payments is 8%.

Explanation:

The implied interest rate (or interest rate implicit in lease) is the rate at which minimum lease payment is equal to current fair value (present value) of asset leased out. Using the following formula we can easily calculate implied interest rate for the lease payments. Detail calculation is given below.

PV = MLPS (1 - (1+interest rate%) ^-period) / i

39,927 = 10,000 (1 - (1+I) ^-5) / I

3.9927 = Anuity factor

(using annuity table)

Interest = 8%