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    Calculate the annual lease payments

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    Leases R Us, Inc. has been contracted by Robotics of Beverly Hills to provide a machine that would assist in automating a large part of their current assembly line. Annual lease payments will start at the begining of each year. The purchase price of this machine is $200,000 and it will be leased by RBH for 5 years. LRU will utilize straight line depreciation of $40,000 per year with a zero book salvage value. However, salvage value is estimated to actually be $35,000 at the end of 5 years. LRU is required to earn a 14%, after-tax rate of return on the lease. LRU uses a marginal tax rate of 40%.

    Calculate the annual lease payments. (Remember, these payments are to be considered at the begining of each year - annuity due.

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    Solution Preview

    Hi there,

    Here is how you calculate the annual lease payments.

    Purchase price = 200,000 minus salvage value of 35,000 = 165,000

    165,000 divided by 5 = 33,000 per year for the principle

    Calculating the value of the interest:

    (200,000 + 165,000) X interest factor

    Also called a lease factor or even a lease fee, this is the interest rate you are being charged. It is expressed as a multiplier that can be used to calculate your monthly payments. For example, 7.2 percent interest, when expressed as a money factor, is .0033. To convert a money factor to an interest rate, multiply by 2,400. To convert an interest rate to a money factor, divide by 2,400. (Always use 2,400 regardless of the length of the loan.)

    Thus, the interest factor is 14% / 2400 = .0058

    (200,000 + 165,000) X .005833 = 2,129

    Total approximate monthly payment = 2,129 + 33,000 = 35,129

    Tax payable = 35,129 X 40% = 14,052

    Total annual payment including taxes = ...