Air Atlantic (AA) has been offered a 3-year-old jet airliner under a 12-year lease arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payments if the opportunity cost of funds is 14 percent.

Question

Quizplus · Accepted Answer

The present value of the lease payments can be calculated using the formula for the present value of an annuity due, since payments are made at the beginning of each period. The formula is PV = P * [(1 - (1 + r)^-n) / r] * (1 + r), where P is the payment amount, r is the interest rate per period, and n is the number of periods. Substituting P = $500,000, r = 0.14, and n = 12, we find the present value. The correct calculation leads to the present value closest to the option D, $3,226,200.

Air Atlantic (AA) Has Been Offered a 3-Year-Old Jet Airliner