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Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, requires payments of $25,000 at the end of each year, and contains
Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, requires payments of $25,000 at the end of each year, and contains a bargain purchase option. At the end of the lease, Montevallo has an option to pay $4,000 (which is significantly less than the estimated fair value at that time) to purchase the equipment. The equipment has a fair value at the inception of the lease of $175,000 and an estimated useful life of 20 years. The lease agreement stipulates that Folio receive a rate of return of 8% each year. Montevallo's incremental borrowing rate is 10% each year. Assume that there is no bargain purchase option and that Montevallo guarantees the $20,000 estimated residual value at the end of the 10-year lease. Montevallo estimates that it is probable that it will have to pay $15,000 cash due to the residual value guarantee. Required: Calculate the present value of the lease payments. For interim computations, carry amounts out to two decimal places. Round your final answer to the nearest dollar. Note: (1) The annuity present value factor of 10 years, 8% interest rate is 6.71; (2) The present value factor of 10 years, 8% interest rate is 0.46
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