The Baltimore, Inc. entered into a five$-$year lease with the Waugh Chapel Company on January $1,$ Year $6.$ Baltimore, the lessor, will require that five equal annual payments of $$25,000$ be made at the beginning of each year. The first payment will be made on January $1,$ Year $6.$ The lease contains a bargain purchase option price of $$12,000,$ which the lessee may exercise on December $31,$ Year $10.$ The lessee pays all executory costs. The cost of the leased property and its normal selling price are $$95,000$ and $$118,236,$ respectively. Collectability of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease. Present value factors for a $7\%$:

Present value of $$1$ for n $=1$

$0\mathrm{.}934579$

Present value of $$1$ for n $=5$

$0\mathrm{.}712986$

Present value of an ordinary annuity for n $=5$

$4\mathrm{.}100197$

Present value of an annuity due for n $=5$

$4\mathrm{.}387211$

$$

If Baltimore requires a $7\%$ annual return, how should the lease be classified?

Question $3$ options:

operating lease

direct financing lease

sales$-$type lease

leveraged lease