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Calculate the present value of the lease payments

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Question - Lease Payments - Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, and requires payments of $25,000 at the end of each year. The equipment has a fair value at the inception of the lease of $175,000 and an estimated useful life of 20 years. The lease agreement stipulates that Folio receive a rate of return of 8% each year. Montevallo's incremental borrowing rate is 10% each year.

Assume that there is no bargain purchase option and that Montevallo guarantees the $20,000 estimated residual value at the end of the 10-year lease. Montevallo estimates that it is probable that it will have to pay $15,000 cash due to the residual value guarantee.

Required - Calculate the present value of the lease payments. Round your answer to the nearest dollar.

Reference no: EM132926470

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