Your client, Danyleyko Leasing Company, is preparing a contract to lease a machine to Souvenirs for a period of 25 years. Danyleyko has an investment cost of $365,755 in the machine, which has a useful life of 25 years and no at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 25 equal rental payments at the end of each of the next 25 years.
Instructions
a. You are requested to provide Danyleyko with the amount of each of the 25 rental payments that will yield an 11% return on investment. Show calculations using (a) factor Table A.4 in Appendix A, (b) a financial calculator, or (c) Excel function PMT.
b. What valuation model is Danyleyko using in the measurement of this lease?
c. Digging Deeper Besides the interest return on this investment, what other risk factors would Danyleyko have considered in pricing this transaction? Do these risks involve measurement uncertainty that needs disclosure in the financial statements?
