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 AA's cost of funds is 14 percent.
A)$2,830,000
B)$13,635,500
C)$6,000,000
D)$3,226,200

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 for the present value of an annuity due is PV = PMT * [(1 - (1 + r)^-n) / r] * (1 + r), where PMT is the payment amount ($500,000), r is the interest rate per period (14% or 0.14), and n is the total number of payments (12). Plugging in the values, we get PV = $500,000 * [(1 - (1 + 0.14)^-12) / 0.14] * (1 + 0.14) = $3,226,200 approximately.

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