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Hi John,
I have a query regarding one of the MCQ’s for F9.
‘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 $52,000. What are the annual lease payments (to the nearest $)?’
Can you remind me how to work this out? Try as I might I cannot get the correct answer. I’m clearly missing something fundamental.
Many thanks
CarmelThere is one payment immediately (time 0 – the start of the first year) followed by 7 more payments from 1 to 7.
If the payment is X each time, then the present value of X at time 0 is X, and the present value of X per year for years 1 to 7 is X times the 7 year annuity factor.
So: X + 4.868X = 52,000; of 5.868X = 52,000
Now you should be able to finish it 🙂
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