Question

Red Sun Rising Corp. has just signed a lease for its new manufacturing facility. The lease agreement calls for annual payments of $1,050,000 for 15 years with the first payment due today. If the interest rate is 3.23 percent, what is the value of this liability today

Answer 1

$12,727,043.35

Step-by-step explanation:

The value of the lease payments today can be ascertained using the formula for the present value of an annuity due shown below:

PV=annual payments*(1-(1+r)^-n/r*(1+r)

annual payments=$1,050,000

r=interest rate=3.23%

n=number of annual payments in 15 years=15

PV=$1,050,000*(1-(1+3.23%)^-15/3.23%*(1+3.23%)

PV=$1,050,000*(1-0.62074194 )/3.23%*1.0323

PV=$1,050,000*0.37925806/ 3.23%*1.0323

PV=$12,727,043.35