Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.

(b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.

(c) Alt depreciates all machinery it owns on a straight-line basis.

(d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.

(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.

Future Value of Ordinary Annuity of 1Period5%6%8%10%12%11.000001.000001.000001.000001.0000022.050002.060002.080002.100002.1200033.152503.183603.246403.310003.3744044.310134.374624.506114.641004.7793355.525635.637095.866606.105106.3528566.801916.975327.335927.715618.1151978.142018.393848.922809.4871710.0890189.549119.8974710.6366311.4358912.29969911.0265611.4913212.4875613.5794814.775661012.5778913.1807914.4865615.9374317.54874

Present Value of an Annuity Due of 1Period5%6%8%10%12%11.000001.000001.000001.000001.0000021.952381.943401.925931.909091.8928632.859412.833392.783262.735542.6900543.723253.673013.577103.486853.4018354.545954.465114.312134.169864.0373565.329485.212364.992714.790794.6047876.075695.917325.622885.355265.1114186.786376.582386.206375.868425.5637697.463217.209796.746646.334935.96764108.107827.801697.246896.759026.32825

From the viewpoint of Yates, what type of lease agreement exists?

Direct-financing lease

Operating lease

Financelease

Sales-type lease