On January 1, 2013, Skull Valley Motors leased a Lincoln Navigator to T. K. Pusan Boots Denny.
Question:
1. What interest rate (compounded monthly) was used in the computation of the $695 monthly payment amount?
2. On December 31, 2015, Skull Valley Motors learned that the Navigator could be sold for only $25,000 at auction instead of the anticipated $30,652. With this actual residual value, what rate of return (compounded monthly) did Skull Valley earn on this 3-year Navigator lease?
3. Assume that Skull Valley did not know about the decline in residual value until the Navigator was sold at auction for $25,000 in 2015. How much net profit, in total, was recognized during the 3-year life of the lease, excluding the final sale of the Navigator at auction? How much gain or loss was recognized when the Navigator was sold for $25,000 at auction?
4. Refer to (2). If the rate of return on the lease is so low, why would Skull Valley Motors continue in the leasing business at all?
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