What is the present value of a 10-year lease with monthly rental payments of $2000 due at the beginning of each month, if the opportunity cost of capital is 8%?

Question

Quizplus · Accepted Answer

The present value of a lease with payments at the beginning of each period (an annuity due) can be calculated using the formula for the present value of an annuity due: $PV = PMT \times \left(\frac{1 - (1 + r)^{-n}}{r}\right) \times (1 + r)$, where PMT is the payment per period, r is the monthly interest rate, and n is the total number of payments. Given an 8% annual interest rate, the monthly rate is $0.08/12 = 0.0066667$. With 10 years of monthly payments, $n = 10 \times 12 = 120$. Plugging these values into the formula gives the present value of the lease. Calculating directly or using a financial calculator with these inputs will give a value close to $165,942, hence option C is correct.

What Is the Present Value of a 10-Year Lease with Monthly