The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years. At a discount rate of 14 percent, what is the present value of this stream of lease payments?
A) $130,872
B) $149,194
C) $142,710
D) $264,000

Question

Quizplus · Accepted Answer

The present value of the lease payments can be calculated using the formula for the present value of an annuity plus the present value of the immediate payment. The immediate payment of $24,000 is already in present value terms, so it doesn't need to be discounted. The annuity formula is PV = P * [(1 - (1 + r)^-n) / r], where P is the payment ($24,000), r is the discount rate (14% or 0.14), and n is the number of periods (10 years). The present value of the annuity (the $24,000 per year for 10 years) is:PV = $24,000 * [(1 - (1 + 0.14)^-10) / 0.14] ≈ $125,194Adding the immediate payment of $24,000 gives a total present value of:$125,194 + $24,000 = $149,194

The Lease on a New Office Requires an Immediate Payment