Question

Red Sun Rising Corp. has just signed a lease for its new manufacturing facility. The lease agreement calls for annual payments of $1,500,000 for 10 years with the first payment due today. If the interest rate is 3.41 percent, what is the value of this liability today?

• $13,606,971.83

• $13,282,996.31

• $11,905,105.65

• $12,959,020.79

• $12,531,690.16

Answer 1

We know, Present value of liability= Present value of future lease payments discounted with the rate of interest
Amount in $
Year	Lease payments	Discounting Factor @ 3.41%	PV of lease payments
1	1,500,000	1	1,500,000.00
2	1,500,000	0.967024466	1,450,536.70
3	1,500,000	0.935136317	1,402,704.48
4	1,500,000	0.904299698	1,356,449.55
5	1,500,000	0.874479932	1,311,719.90
6	1,500,000	0.845643489	1,268,465.23
7	1,500,000	0.817757943	1,226,636.91
8	1,500,000	0.790791938	1,186,187.91
9	1,500,000	0.764715151	1,147,072.73
10	1,500,000	0.739498261	1,109,247.39
		Total	12,959,020.79
Therefore, Option C ($12,959,020.79) is the correct answer.