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a company has arranged a ten-year lease at an annual rental of $8000. the first rental payment has to be made immediately(i.e in advance) and the other is to be paid at the start of each succeeding year.
what (approximately) is the present value of the lease at a discount rate of 12% per annumcumulative discount factor for 1-9 years at 12% is =5.328
cumulative discount factor for 1-10 years at 12%=5.650options
A. $50,640
B. $51,562
C. $45,200
D. $49,852sir, I am getting an answer as C but it says the answer is A I don’t understand how come they get 50,640. can you explain
Given that the first payment is made immediately, it is paid at time 0 and the PV is 8,000 paid at time 0 is 8,000.
There are then 9 further payments from time 1 to time 9.
Therefore the PV of the 9 further payments is calculated using the 9 year annuity factor and is 8,000 x 5.328 = 42,624.
Therefore the total PV is 8,000 + 42,624 = 50,624 (the difference from 50,640 will be due to the rounding in the tables to three decimal places, which is why the question asks for the approximate answer).
Annuity factors only apply to flows starting in one years time, as I explain in my lectures.
yea sir got the answer i didn’t looked for the word approximately was not getting exact but was getting value of 50,624. thank you sir for help
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