James leases a ski chalet to his best friend, Janet.The lease term is five years with $22,000 annual payments due at the beginning of each year.What is the present value of the payments discounted at 8% per annum?

Question

Quizplus · Accepted Answer

We can use the formula for present value of an annuity due:

Present value = Payment x [(1 - (1 + r)^-n) / r] x (1 + r)

where r is the discount rate, n is the number of periods, and Payment is the annual payment.

Plugging in the given values, we get:

Present value = $22,000 x [(1 - (1 + 0.08)^-5) / 0.08] x (1 + 0.08)
Present value = $87,840

Therefore, the present value of the lease payments is $87,840, and the best choice is B.

James Leases a Ski Chalet to His Best Friend, Janet