Lane Co. has a machine that cost $800,000. It is to be leased for 20 years with rent received at the beginning of each year. Lane wants a return of 10%. Calculate the amount of the annual rent.

Period Present Value of Ordinary Annuity

19 8.36492

20 8.51356

21 8.64869

Question options:

a) $95,636

b) $93,968

c) $118,912

d) $85,425

Answer: b. $93680

Explanation:

The cost of machine leased is $800000 with a required return of 10%, to calculate the Rental payments. We will use Loan repayment formula that calculates yearly required payments. the required payments represents rental payments Lane Co needs to make in order to earn a required return of 10%

cost = Present value = $800000

lease period = 20 years

required return (r) = 10%

Rental Payments = rPv / (1 - (1 + r) ^-20

Rental Payments = (800000 x 0.10) / (1 - (1 + 0.10) ^-20) = 80000 / (1 - (1.10) ^-20)

Rental Payments = 93967.699815 = 93968