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, 10payments).

Included within the lease payments are executory costs of $500.

Fair value of the machine at lease inception: $27470.

REQUIRED:

Determine the interest rate implicit in the lease.

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%?