A company has decided to lease a machine.Six annual payments of $8,000 will be made with the first payment on receipt of the machine.
What is the present value of the lease payments at an interest rate of 10%?
Before looking at the answer at the back , my calculation was like this
8,000 x 4.355=34,840
But according to the answer its
8,000 + (8,000×3.791)=38,328
Help me sir i’m a little bit confused here. Why they add 8,000 ? And why they only count for 5 years (3.791)?
focus on the line “with the first payment on receipt of the machine”.
This means that the first installment will be made immediately i.e year 0.
Thats why we use discount factor 1.000 for first payment of 8,000 & 3.791 for the remaining 5 payments which will be made at the end of each year.
Hope it helped you.
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