Question

Air Atlantic has been offered a 3 year-old jet airlines under a 12-year arrangement. The lease requires AA to make annual lease payments of $500,000 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?

a. 2,543,000

b. 3,226,200

c.3,966,754

Please, show all the procedure. Thanks

Answer 1

Year	Annual lease payment	Discount Factor (DF)	DF	Lease Payment X Discount Factor
0	$    500,000.00	1/(1+14%)^0	1.00	$     500,000.00
1	$    500,000.00	1/(1+14%)^1	0.88	$     438,596.49
2	$    500,000.00	1/(1+14%)^2	0.77	$     384,733.76
3	$    500,000.00	1/(1+14%)^3	0.67	$     337,485.76
4	$    500,000.00	1/(1+14%)^4	0.59	$     296,040.14
5	$    500,000.00	1/(1+14%)^5	0.52	$     259,684.33
6	$    500,000.00	1/(1+14%)^6	0.46	$     227,793.27
7	$    500,000.00	1/(1+14%)^7	0.40	$     199,818.66
8	$    500,000.00	1/(1+14%)^8	0.35	$     175,279.53
9	$    500,000.00	1/(1+14%)^9	0.31	$     153,753.97
10	$    500,000.00	1/(1+14%)^10	0.27	$     134,871.90
11	$    500,000.00	1/(1+14%)^11	0.24	$     118,308.69
			PV of lease payment	$ 3,226,366.51
The correct answer is b. 3,226,200