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 ```Smith Co. has a machine that cost \$200,000. It is to be leased for 20 years with rent received at the beginning of each year. Smith wants a return of 10%. Calculate the amount of the annual rent. Period: 19 Present value of ordinary annuity: 8.36492 Period: 20 Present value of ordinary annuity: 8.51356 Period: 21 Present value of ordinary annuity: 8.64869``` Request for Question Clarification by omnivorous-ga on 27 Nov 2006 07:17 PST ```Steph -- There are a couple of problems with this question as stated: * Smith Co. would normally depreciate the equipment, changing cash flow from income taxes * the problem makes it appear as if the company is borrowing at 0%, which is unlikely. Are you trying to calculate a gross return of 10% on \$200,000 -- or a real rate of return based on some cost of capital? Best regards, Omnivorous-GA``` Clarification of Question by steph21480-ga on 27 Nov 2006 07:46 PST ```Hi there! The assumption is that the equipment was paid cash, and what I?m trying to determine is the annual rent in order to produce a 10% return on the \$200,000 investment. Does that make sense?``` Request for Question Clarification by omnivorous-ga on 27 Nov 2006 08:01 PST ```Steph -- Actually it doesn't make sense because we have no cost of money. As it is stated, Smith Co. could simply price the lease at \$11,000 per year to get \$220,000 over the period of the equipment life. But that ignores cost-of-money (which an NPV factor takes into account). It also ignores taxes, which are important in equipment leasing. I recognize that may be outside the scope of this question but you'll certainly need a cost-of-capital rate for Smith Co. Best regards, O.```