Question

Domebo Corporation has entered into a 7 year lease for a piece of equipment. The annual payment under the lease will be $3,000, with payments being made at the beginning of each year. If the discount rate is 12%, the present value of the lease payments is closest to (Ignore income taxes:__________. a) $21,000 b) $8692 c) $13,692 d) $18,049 e) $15.333

Answer 1

Answer:

The correct answer is:

$18,049 (d)

Explanation:

First, let us lay out the information given clearly:

Period of lease = 7 years

annual payments = $3,000

discount rate = 12% = 12/100 = 0.12

Note the the present value of lease payments is the same thing as total value of the lease payment, before any payments have been made.

Next, without the interest, the total value of the lease payment is calculated as:

Total amount to be paid = annual payments × period of lease (time)

= 3,000 × 7 = $21,000

Next, we are told that there is a discount rate of 12%, this will reduce the total amount to be paid by 12%, and this is calculated as:

discount on lease payment = 12% of total amount  

= 0.12 × 21,000 = $2,520

Finally the new amount to be paid is calculated by subtracting the discount from the total value, and this is calculated thus:

present value of lease payments = Total payments - discount

= 21,000 - 2,520 = $18,480 ( closest to $18,049)