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How would I tackle a question like this?
If a company has agreed to lease a machine for a period of 8 years with equal annual payments payable at the start of each year. The NPV of the agreement at a rate of 10% is $52000. What is the annual lease payment?
Thanks
If X is the payment each year, then there is a payment of X at time 0 (the first year starts now, time 0) followed by X per year for times 1 to 7
The present value of X now is X
The present value of X per year for 7 years is X times the 7 years annuity factor and 10%.
If you add these together and make them equal to 52,000, then you should be able to calculate X 🙂
Dear John,
Please confirm the calculation will be as below for this question
Annuity factor for 7 years @ 10% = 4.868 + 1 (for payment at year 0)
Lease payment per year = $ 52,000/5.868 = $ 8,862
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