Question

Schaad Corporation has entered into an eight-year lease for a piece of equipment. The annual payment under the lease will be $2,500, with payments being made at the beginning of each year. If the discount rate is 14%, what’s the present value of the lease payments? Ignore income taxes in this problem

Answer 1

Based on the payments being made at the beginning of the year and the discount rate, the present value of the lease payments is $13,220.75.

What is the present value of the lease payments?

The fact that the payments are made at the beginning of the year makes this an annuity due.

The present value is:

= Amount x ( Present value of annuity due factor, 14%, 8 years)

Solving gives:

= 2,500 x 5.2883

= $13,220.75

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