Delaney Company leases an automobile with a fair value of $10,000 from John Simon Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months.
2. Rental of $200 per month (at the beginning of each month). (The present value at 0.5% per month is $8,873.)
3. Delaney guarantees a residual value of $1,180 (the present value at 0.5% per month is $920). Delaney expects the probable residual value to be $1,180 at the end of the lease term.
4. Estimated economic life of the automobile is 60 months.
5. Delaney’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.

Required:
a. What is the nature of this lease to Delaney?
b. What is the present value of the lease payments to determine the lease liability?