On January 1, Smith Industries Leased Equipment to a Customer

On January 1, Smith Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to Smith. The equipment cost Smith $350,000 and has an expected useful life of six years. Its normal sales price is $350,000. The residual value after four years is $50,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 5%. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar amount.) The present value of $1: n = 4, i = 5% is 0.82270.
The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595.
The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.

A) $87,104
B) $82,955
C) $98,704
D) $77,337

Correct Answer:

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