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.):

multiple choice
A. $12,528
B. $14,103
C. $14,808
D. $11,050

Answer 1

The present value of Suddeth Corporation's 6-year warehouse lease payments with an annual payment of $2,468, discounted at 5%, is approximately $12,528, which corresponds to option A.

Step-by-step explanation:

To calculate the present value of the lease payments for Suddeth Corporation under a 6-year lease with an annual payment of $2,468 and a discount rate of 5%, we need to discount each payment to its present value and then add up those present values.

Present Value of Annuity Formula: PV = PMT [((1 - (1 + r)^-n) / r)], where PMT is the annual payment, r is the discount rate, and n is the number of periods.

Using the formula: PV = $2,468 [((1 - (1 + 0.05)^-6) / 0.05)]:

First, calculate the inside of the brackets (1 + 0.05)^-6 = 0.74622.

Second, subtract this from 1 to get 0.25378.

Finally divide by 0.05 to get 5.0756 and multiply by the PMT ($2,468) to get a present value of approximately $12,528.

Therefore, the correct choice is $12,528 which corresponds to option A.