Question
12 Rankin Ltd has entered into an agreement to lease an item of equipment that produces teddy bears. The terms of the lease are as
12 Rankin Ltd has entered into an agreement to lease an item of equipment that producesteddy bears. The terms of the lease are as follows:
Date of entering lease: 1 July 2015.
Duration of lease: 10 years.
Life of leased asset: 10 years.
There is no residual value.
Lease payments: $5000 at lease inception, $5500 on 30 June each year (that is, 10
payments).
Included within the lease payments are executory costs of $500.
Fair value of the machine at lease inception: $27470.
Solution:
To undertake this calculation students may use trial and error. The implicit rate is 18%, proven as follows:
Present value of initial payment | $5000 x 1.0 = | $5000 |
Present value of yearly payments | ($5500 $500) x 4.4941 = | $22 470 |
Fair value at lease inception |
| $27 470 |
My question:
why 18%? how to get 18%?
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