CHAPTER 13 ACTIVITY/ASSIGNMENT

1. An office equipment representative has a machine for sale or lease. If you buy the
machine, the cost is ₱7,596. If you lease the machine, you will have to sign a
noncancelable lease and make 5 payments of ₱2,000 each. At the time of the last
payment you will receive title to the machine. The first payment will be made on the
first day of the lease. The interest rate implicit in this lease is approximately.

Ans. 16%
Solution:
PV = Cash flows x PV factor
7,596 = 2,000 x PV annuity due @ x%, n=5

First trial @ 12%:

(2,000 x PV annuity due @ 12%, n=5) = 7,596
(2,000 x 4.0373) = 7,596
8,075 is not equal to 7,596

We need a lower amount. Therefore, we will increase the rate. Let us try 16%.

Second trial @ 16%:

(2,000 x PV annuity due @ 16%, n=5) = 7,596
(2,000 x 3.7982) = 7,596
7,596 is equal to 7,596. Therefore, the implicit interest rate is 16%.