Elston Company has entered into two lease agreements. In each case the cash equivalent purchase price of the asset acquired is known and you wish to find the interest rate which is applicable to the lease payment.
Instructions: Calculate the implied interest rate for the lease payments.
Lease A covers office equipment which could be purchased for $59,008. Elston Company has, however, chosen to lease the equipment for $12,000 per year, payable at the end of each of the next 6 years.
Lease B applies to a machine which can be purchased for $34,868. Elston Company has chosen to lease the machine for $10,000 per year on a 4-year lease. Payments are due at the start of each year.
This solution illustrates how to compute the implied interest rates on leases.