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.