Lease
Installment Present value
Lease installment are regular payment of equal amount,
therefore annuity factor may be applied to calculate the present value of these
installment.
Lease
installment Present Value Example
|
Term
of Lease
|
4 Year
|
|
Lease
Rental (paid in advance)
|
40,000
|
|
Rate
of interest is
|
12%
|
|
|
|
Solution
1. Timeline of payment
|
0
|
1
|
2
|
3
|
|
40,000
|
40,000
|
40,000
|
40,000
|
2. Annuity Factor for Year 0
We know that annuity factor of year 0 is 1.
3. Annuity Factor for year (1-3)
=
1- (1+i)-3
I
=
2.40
4. Annuity Factor for ( 0-4)
=
1+ 2.40
=3.40
5. Present value of Lease installment
=
40,000 x 3.40
=136,000
