### CFA Practice Question

There are 520 practice questions for this study session.

### CFA Practice Question

West Company leased a new machine from South Company on May 1, 2015 for 10 years with annual lease payments of \$40,000 at the start of each lease year. The machine has an estimated useful life of 12 years. The appropriate discount rate to be used is 14% and the present value of \$1 for 10 periods at 14% is 0.27. The present value of an annuity of \$1 for 10 periods at 14% is 5.95. The lease contract included a residual value guarantee of \$50,000. West should record a capitalized leased asset on their books of ______.

A. \$251,500
B. \$238,000
C. \$224,500

Since it is guaranteed, the \$50,000 residual value is discounted as a lump sum for 10 years at 14%. The \$40,000 lease payment is an annuity that is discounted. The correct computation is [(\$50,000 * .27) + (\$40,000 * 5.95)] = \$13,500 + \$238,000 or \$251,500.

User Comment
kalps NB it is guaranteed so it will be paid at the end of teh period. If it was an option then you would look at the probability of exercising that option and make a conservative estimate
isida the residual value guarantee is discounted as a lump sum
o123 ** PV OF THE \$1 ANNUITY IS NOT 5.95, ITS 5.216!!

Value of 40,000 annuity: N=10, i/y=14, pmt=40,000 CPT PV= 208,645
value of 50,000 Lump sum: N=10, i/y=14, FV=50,000 CPT PV= 13,487
BV; 13,487 + 208,645 = 222,132
o123 Wow...sorry people I'm going to have to take back that last comment once again...and take my hat off to the people at AN aswell.
Just noticed the fine print: the lease payment is at the beginning of the period (Annuity Due)! so set your calc to the BGN mode and run the same calculations.
quynhnk79 Great, you so responsible man! Thank you.