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A lease agreement has a net present value of ($26,496) at a rate of 8%. The lease involves an immediate down payment of $10,000 followed by four equal annual payments.
What is the amount of the annual payment?
A $11,020
B $4,981
C $11,513
D $14,039Well this one is really tough one to crack .The annuity factor of year 1-4 at 8% will be 3.312 but how we will find the annual payment?
The PV of the immediate payment is 10,000.
Therefore the PV of the remaining 4 payments is 26496 – 10000 = 16496.If the amount of each payment is X, then the PV of the 4 payments is X x 3.312.
This must be equal to 16496, and therefore X = 16496 / 3.312 = 4981.Logically still a bit confused but if such question will come again i will tackle it.That,s why practice is essential in all ACCA exams.
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