Question

On June 30, 2018, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $604,152 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic’s incremental borrowing rate is 10%, the same rate IC uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The fair value of the warehouse is

Answer 1

Answer:

The fair value of the warehouse at June 30th, 2018 is 4,100,001 dollars

Explanation:

We have to calculate the present value of annuity-due (first payment is done at the beginning of the period) for eight payment of 604,152 dollars at 10% discount rate

$C \times \frac{1-(1+r)^{-time} }{rate}(1+r) = PV$

C 604,152.00 dollars

time: 4 years x 2 payment per year: 8

rate: 10% annual thus: 0.10 / 2 = 0.05 semiannual rate

$604152 \times \frac{1-(1+0.05)^{-8} }{0.05}(1+.05) = PV$

PV $4,100,001.0608