Pyrène leases an industrial furnace for 5 years: a fixed annual payment of 40,000 made at the end of each year and a variable payment of 2% of the sales generated with the furnace, estimated at 15,000 per year. At the end of the lease, Pyrène may buy the furnace for 20,000; the analysis concludes that the exercise of this option is reasonably certain. The implicit rate cannot be readily determined; the incremental borrowing rate of 6 % is used. Compute the lease liability at the commencement date, rounded to the nearest euro.
- Fixed annual lease payment made at the end of the year
- 40,000
- Lease term
- 5
- Incremental borrowing rate
- 6 %
- Exercise price of the purchase option
- 20,000
- Estimated annual variable payment (based on sales)
- 15,000