Calculate Lease Payment by Lessor

question 92

Essay

Calculate lease payment by lessor
Lessor Corporation (a private company using ASPE) has a $ 500,000 piece of machinery that they want to lease to Lessee Corporation. Lessor wants to earn a 9% return on its lease. The machinery will be leased for 7 years and the annual rental payment will be due at the beginning of each year. The lease doesn't include a bargain purchase option or residual value at the end of the lease.
Calculate the annual lease payment Lessor Corporation should charge to Lessee Corporation.

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Definitions:

Cash Payback Period

The time it takes for an investment to generate an amount of cash flow equal to the initial investment cost.

Annual Net Cash Flows

The amount of cash that a company generates or uses in a given year after all income and expenses are accounted for.

Average Rate of Return

A financial ratio that represents the average net profit or return expected on an investment over its lifetime, expressed as a percentage.

Straight-Line Depreciation

A method of calculating the depreciation of an asset, dividing its cost minus salvage value by its useful life, resulting in equal annual depreciation expenses.