The Minnesota Twins Baseball Club has 1.5 years remaining on the lease of a stadium. They are required to pay $950,000 at the beginning of every three months over that time. This is reflected on their balance sheet as a liability of $5,250,000. What is the quarterly compounded nominal rate implied in this calculation?

Question

Quizplus · Accepted Answer

The liability of $5,250,000 reflects the present value of the future lease payments. Given that there are 1.5 years remaining and payments are made quarterly, there are 6 payments of $950,000 each. To find the nominal quarterly compounded rate, we use the present value formula for annuities:$$PV = PMT \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)$$Where:- $PV = \$5,250,000$ (present value of the lease liability),- $PMT = \$950,000$ (quarterly payment),- $n = 6$ (number of payments),- $r$ is the quarterly interest rate we need to find.Rearranging the formula to solve for $r$ involves trial and error or financial calculator functions. The correct rate that aligns the present value of the annuity (lease payments) with the liability recorded ($5,250,000) is found to be approximately 13.648%, which corresponds to choice E. This calculation typically requires the use of a financial calculator or spreadsheet software to solve for the rate that makes the present value of the annuity equal to the recorded liability.

The Minnesota Twins Baseball Club Has 1