[jorden_rowrow]

Glade Co. leases computer equipment to customers under U.S. GAAP direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

they use the equation: PV = annual rents x annuity due PV factor [n = 5, i = 8%] but I thought interest revenue was gross investment-net investment?

[Anonymous]

Yes, you are right, but you will need both equations to solve the problem.

If PV = annual rent x annuity due factor, then
annual rent = PV / annuity due factor, and
annual rent = 323,400 / 4.312 = 75,000

Gross investment = 75,000 per year x 5 years = 375,000

Interest revenue = gross investment – net investment = 375,000 – 323,400 = 51,600

[Anonymous]

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[Author]

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