Question

Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. If the discount rate is 5%, the present value of the lease payments is closest to (Ignore income taxes.):A) $12,528B) $14,103C) $14,808D) $11,050

Answer 1

Answer:

A) $12,528

Explanation:

We should consider the rent payment as an annuity. Because we are paying, it should be considered the present value of an annuity.

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

C  2,468

time 6

rate         0.05

$2468 \times \frac{1-(1+0.05)^{-6} }{0.05} = PV$

PV $12,526.8080

We are asked for the closet option, so we have to chose A) 12,528