Your client, Danyleyko Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for

Question:

Your client, Danyleyko Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 25 years. Danyleyko has an investment cost of $365,755 in the machine, which has a useful life of 25 years and no salvage value at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 25 equal rental payments at the end of each of the next 25 years.

Instructions

a. You are requested to provide Danyleyko with the amount of each of the 25 rental payments that will yield an 11% return on investment. Show calculations using (a) factor Table A.4 in Appendix A, (b) a financial calculator, or (c) Excel function PMT.

b. What valuation model is Danyleyko using in the measurement of this lease?

c. Digging Deeper Besides the interest return on this investment, what other risk factors would Danyleyko have considered in pricing this transaction? Do these risks involve measurement uncertainty that needs disclosure in the financial statements?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...

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