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# Calculate the annual lease payments

A corporation has contracted to provide lease financing for a machine to automate an assembly line. Annual lease payments will start at the beginning of each year.

The purchase price of this machine is \$250,000.00, and it will leased for five years. They will utilize straight line depriciation of \$50,000.00 per year with a zero book salvage value. However, salvage value is estimated to actually be \$50,000.00 at the end of 5 years.
A 3% quarterly after tax rate of return is required. These payments are considered annuity due at the beginning of each year. A marginal tax rate of 35% is used.
Calculate the annual lease payments. These payments are to be considered at the begining of each year - annuity due.
Please show calculations and/or formulas in excel to allow better understanding of the process.

#### Solution Preview

Hi there,

Here is how you solve this question:

Purchase price = 250,000 minus salvage value of 50,000 = 200,000 residual value

Now take the 200,000 and divide by 5 years, equalling 40,000 per year.

A 3% quarterly after tax rate of return is required. I interpret this to mean that the interest rate on annual basis will be 12%.

(250,000 + 200,000) X 0.005 = 2,250

The 0.005 is referred to as the Money Factor. It is derived by taking 12% and dividing it by a factor of 2400.

40,000 + 2,250 gives you a total of 42,250 for a total lease payment, excluding taxes.

Taxes = 42,250 X 35% = 14,788

14,788 + 42,250 = 57,038 for a total annual lease payment including taxes.

I hope this helps.

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I have attached a copy of a sample exercise to assist you for your future reference:

Payment Estimating

You can calculate a "bottom-line lease" that represents the very best deal you could get. If you get payments within \$20 a month of this (in a 36-month lease), you will have done well.

To calculate a bottom-line lease ...

\$2.19