Finding the Implied Interest Rate

question 73

Essay

Finding the implied interest rate.
Bates 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 payments.
InstructionsCalculate the implied interest rate for the lease payments.Lease A - Lease A covers office equipment which could be purchased for $126,168. Bates Company has, however, chosen to lease the equipment for $35,000 per year, payable at the end of each of the next 5 years.Lease B - Lease B applies to a machine which can be purchased for $134,141. Bates Company has chosen to lease the machine for $28,000 per year on a 6-year lease. Payments are due at the start of each year.

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Definitions:

Contribution Margin Ratio

The percentage of each sales dollar that contributes to covering fixed costs and generating profit.

Products

Goods or services that are created through a business process and offered in the market to satisfy the needs or wants of customers.

Predetermined Overhead Rate

This is a rate calculated before the accounting period begins, used to allocate manufacturing overhead costs to products.

Machine-Hours

A measure of the amount of time machinery is in operation, commonly used as a basis for allocating machine related costs to products.