Stone Co. is considering the acquisition of equipment. To buy the equipment, the cost is $15,192. To lease the equipment, Stone must sign a noncancelable lease and make five payments of $4,000 each. The first payment will be paid on the first day of the lease. At the time of the last payment, Stone will receive title to the equipment. The present value of an ordinary annuity of $1 is as follows: Present Value No. of Periods 10% 12% 16% 1 0.909 0.893 0.862 2 1.736 1.690 1.605 3 2.487 2.402 2.246 4 3.170 3.037 2.798 5 3.791 3.605 3.274 The interest rate implicit in this lease is approximately
A. 10%.
B. 12%.
C. Between 10% and 12%.
D. 16%

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andromache andromache · Answer 1 · 2019-09-06T10:59:14+02:00

Answer:

D.16%

Explanation:

To compute the interest rate, we have to follow the necessary steps which are explained below:

Step 1: Compute the amount financed of the equipment. It is shown below:

= Cost of equipment - first payment

= $15,192 - $4,000

= $11,192

Step 2: Now divide step 1 amount by each payment amount. So, the answer would be:

= $11,192 ÷ $4,000

= $2.798

Since the present value of an ordinary annuity in 4th year contains 16 % have a present value factor of 2.798.

So, the interest rate would be 16%