Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms. The lease term is 8 years, noncancelable, and requires equal rental payments due at the beginning of each year starting March 1, 2022. The equipment has a fair value of $450,000, and cost Chavez $325,000, at the inception of the lease (March 1, 2022). Lehman Dairy has the option to purchase the equipment for $10,800, at the end of the lease. This represents a signficant discount on the equipment. The estimated economic life of the equipment is 10 years, and a residual value (which is guaranteed by Lehman Dairy) of $30,000. If the purchase option is not exercised, Lehman Dairy expects to pay $18,000 under the guaranteed residual value. The lease contains no renewable options, and the equipment reverts to Chavez Finance Company upon termination of the lease, if the purchase option is not exercised. Lehman Dairys incremental borrowing rate is 8% per year. Chavezs implicit rate is 6% and is known to Lehman Dairy. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.