15.9. The irish inn is contemplating the purchase or the lease of a new dryer. Tip O'Donnell, owner of the Irish Inn, believes that the lease would not be capitalized and thus his financial ratios would not be adversely affected by the lease. He has asked you to examine the proposed arrangement, which is as follows

terms of lease: 5 years

estimated life of dryer: 8 years

Incremental cost of borrowing - 12%

Lease payments due:

First payment due at signing of the lease (january 1 20X1

next four payments annually beginning at january 1, 20X2

Annual lease payment amounts : $1,500

First lease payment amount: $1,000

Fair market value: $4,500

Option to buy at the end of lease: NO

Will the dryer be given to the lessee at the end of the lease term: no

Required:

1. Determine the present value of the lease payment stream
2. should the lease be capitalized? Why or why not?