Answer: higher.

## Explanation The rate implicit on the lease (RIL) is **higher** than the bank loan rate of 9.68%. **Reasoning:** To calculate the RIL, we need to find the discount rate that equates the present value of lease payments to the fair value of the asset minus the present value of the residual value. **Given:** - Asset cost: GBP 80 million - Annual lease payments: GBP 12 million (beginning of each year) - Lease term: 10 years - Residual value: GBP 5 million - Lessor's direct costs: GBP 2 million - Bank loan rate: 9.68% **Calculation approach:** The RIL is the discount rate that satisfies: PV(Lease Payments) = Asset Cost - PV(Residual Value) + Direct Costs Using trial and error or financial calculator: - At 9.68%, the PV of lease payments would be lower than the effective asset cost - A higher rate is needed to make the PV of lease payments equal to the net investment - The RIL typically includes the lessor's profit margin and costs, making it higher than the company's borrowing rate **Conclusion:** The RIL is higher than the 9.68% bank loan rate.

Author: LeetQuiz Editorial Team