Question

Microsoft leases rights to Microsoft Word, Excel, Powerpoint and other software applications to NJCU School of Business, Campus Administration for 14 annual payments of $8,500 at the beginning of each year. The payments will begin five years from today. If the market rate of interest is 8%, what is the present value of the payments?

Provide the answer in Excel with formula please

Answer 1

Since this is a case of annuity and we need to find out the present value of those annual payments, we can use PV function of excel. Under PV function following items are given:

PMT = Annual Cashflow i.e. $8500

Rate = Market Interest Rate = 8%

NPER = Number of Periods = 14 Years

After running PV function, we would get at the present value of those cashflows from when it starts. It means we would get the present value 4 years from now as first cashflow would happen at the end of year 5. So, we need to discount that back for 4 more years to arrive at the present value of those cashflows today.

Below are the screenshot of the excel containing the formulas for above operations and the results of those operations.

As seen in the screenshot, present value of cashflow turned out to be $51,507.96 for Microsoft.