Lessee, Inc

question 29

Essay

Lessee, Inc., acquired the use of a machine by agreeing to pay the manufacturer of the machine $20,000 per year for 5 years.At the time the lease was signed, the interest rate for a 5-year loan was 8%.
Required:
(a.)Use the appropriate factor from Table 6-5 to calculate the amount that Lessee, Inc.could have paid at the beginning of the lease to buy the machine outright.
(b.)What causes the difference between the amount you calculated in part (a.)and the total of $100,000 ($20,000 per year for 5 years)that Lessee, Inc.will pay under the terms of the lease?
(c.)What is the appropriate amount of cost to be reported in Lessee, Inc's balance sheet (at the time the lease was signed)with respect to this asset?

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Definitions:

Contribution Margin

The difference between the sales revenue of a product and its variable costs.

Net Present Value

The disparity between cash inflows' present value and cash outflows' present value through a certain time frame, utilized to determine an investment's profitability.

Fixed Costs

Costs that do not change with the level of output or sales, such as rent, salaries, and insurance premiums.

Cash Break-even Point

The point at which a business's cash inflows equal its cash outflows, excluding financing.