Question

The Hardaway Corporation plans to lease a \(740,000 asset to the O’Neil Corporation. The lease will be for 11 years.

b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of \)740,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments, (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a 13 percent return on the 11-year lease

Short answer

The revised lease payments will be $117,111.

Step-by-step solution

Information provided in question

Value of asset = 740,000

Lease period = 11 years

ROI = 13%

Calculation of net cost of asset

The net cost of asset is $666,000.

$$\begin{gathered} \mathbf{\text{Net cost}}\mathbf{=}\mathbf{\text{Value of asset}}\mathbf{-}\mathbf{\text{Deduction in lease payments}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{740}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{(}\mathbf{\$}\mathbf{740}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{)} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{740}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{666}\mathbf{,}\mathbf{000} \end{gathered}$$

Calculation of lease payments

The lease payments will be $117,111.

$$\begin{gathered} \mathbf{\text{Lease payments}}\mathbf{=}\frac{\mathbf{\text{PV of lease payments}}}{{\mathbf{\text{PVAF}}}_{\left(i=13\%,n=11years\right)}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{666}\mathbf{,}\mathbf{000}}{\mathbf{5}\mathbf{.}\mathbf{6869}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{117}\mathbf{,}\mathbf{111} \end{gathered}$$