Question
In: Finance
Suppose an operating lease calls for annual payments of $500,000 for six years. If you were...
Suppose an operating lease calls for annual payments of $500,000 for six years. If you were to capitalize that lease, what would be the value of the liability on the Balance Sheet at the end of Year 2? Assume a discount rate of 6%.
| A. |
$1,712,523 |
|
| B. |
$1,693,606 |
|
| C. |
|
|
| D. |
$1,722,255 |
|
| E. |
$1,732,553 |
Solutions
Expert Solution
> Formula
Liability = Present Value of pending outflow
> Calculation
Liability at the end of year 2 = Annual Payment * PVAF ( r, n )
where PVAF is the present value annuity factor
= 500000 * PVAF (6%, 4)
= 500000 * [ 1/1.06 + 1/1.062 + 1/1.063 + 1/1.064 ]
= 500000 * 3.46511
= $ 1732553
> Answer
The correct choice is Option E.
Hope you understand the solution.
jeff jeffy answered 1 year agoRelated Solutions
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