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MGT401 GDB 2 Solution Spring 2012

ABC Enterprises has planned to purchase an asset on lease from G Corporation. The fair value of the asset is Rs.100,000 and the lease rentals will be Rs.15,636 payable half-yearly whereas Rs. 20,000 payable as down payment. The un-guaranteed residual value of the asset after the three-years lease period will be Rs.4,000. The implicit annual interest rate in the lease agreement is 9.5%. The present value of the minimum lease payment is Rs.80,000. The last payment is to be made in full along with the interest charges due.

Required:

Find out the total amount of installments and interest respectively associated with this lease agreement.

Solution:

Fair Value       = 100,000

Down Payment= 20,000

Interest Rate    = 9.5% P.A

Installments     = 6 half yearly

 

No. of Installments Lease Rental Financial Charges Principal Principal Outstanding
        80,000
1 15,636 3,800 11,836 68,164
2 15,636 3,238 12,398 55,766
3 15,636 2,649 12,987 42,779
4 15,636 2,032 13,604 29,175
5 15,636 1,386 14,250 14,925
6 15,634 709 14,925 0
Total 93,814 13,814 80,000  

 

Outstanding Principal is 80,000 because 20,000 is down payment which is less in fair value. Last installment is 15634 because in the given scenario written The last payment is to be made in full along with the interest charges due.

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