Question

On January 1, 2019, Ashly Farms leased a hay baler from Agrico Company. The lease requires Ashly to make $3,000 payments on January 1 of each year for 5 years beginning in 2019. The interest rate is 12%. Required: Calculate the present value of Ashly’s lease payments as of January 1, 2019.

Answer 1

Answer:

$12,112.048

Explanation:

As for the information provided:

Lease payment amount = $3,000 each.

Period of lease = 5 years

Date of payment = 1 January each year

Rate of discount = 12%

Since first payment is made today the present value factor will be 1

Thereafter the present value cumulative discount factor for other four years @ 12% = 3.037

Now net cumulative factor for all the years included the present payment to be made today = 3.037 + 1 = 4.037

Therefore, present value of all the lease payments today = $3,000 $\times$ 4.037 = $12,112.048

Note: Present value discount factor shall be for 5 years as follows:

= $\frac{1}{(1+0.12)^0} + \frac{1}{(1+0.12)^1} + \frac{1}{(1+0.12)^2} + \frac{1}{(1+0.12)^3} + \frac{1}{(1+0.12)^4}$