The Betzes have leased an auto for 2 year at $600/month. If money is worth 8%/year compounded monthly, what is the equivalent cash payment (present value) of this annuity?
A) $6,317.25
B) $13,266.33
C) $1,069.96
D) $15,559.91

Question

The Betzes have leased an auto for 2 year at $600/month. If money is worth 8%/year compounded monthly, what is the equivalent cash payment (present value) of this annuity? ​
A) $6,317.25
B) $13,266.33
C) $1,069.96
D) $15,559.91

Quizplus · Accepted Answer

Using the formula for present value of an annuity:

PV = (PMT * (1 - (1+r)^-n) / r)

Where PMT is the monthly payment, r is the monthly interest rate (8%/12 = 0.00667), and n is the number of months (2 years * 12 months/year = 24 months).

PV = (600 * (1 - (1+0.00667)^-24) / 0.00667)
PV = $13,266.33

Therefore, the equivalent cash payment (present value) of the lease is $13,266.33, so the best choice is B.

The Betzes Have Leased an Auto for 2 Year at $600/month