Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,800 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

Lease Payment	Cash Payment	Effective Interest			Decrease in Balance			Outstanding Balance
									40,380
1	8,400		??			??			31,980
2	8,400		1,599			6,801			25,179
3	8,400		1,259			7,141			18,038
4	8,400		902			7,498			10,540
5	8,400		??			??			??
6	2,800		133			2,667			0

What is the effective annual interest rate? (Round your answer to the nearest whole percent.)

Multiple Choice

• 4%.

• 5%.

• 11%.

• 7%.