Question

Question 3 1 pts Sandra signed a 8-year lease for her new business. The full annual lease amount is due at the beginning of every year. She will pay 27,645 dollars now for the first year, and each subsequent payment will increase by 3% per year. If the interest rate is 7% per year, compounded monthly, compute the net present value of the lease. (note: round your answer to two decimal places; do not include spaces or dollar signs.)

Answer 1

Compounding is monthly. So,

Effective interest rate=i=(1+7%/12)^12-1=7.229008%

Growth rate=g=0.03

NPW of lease=PVg*(1+i)

NPW of lease=Pvg*(1+0.07229008)

where

$PVg=\frac{R}{i-g}*\left [ 1-\frac{(1+g)^{n}}{(1+i)^{n})} \right ]$

$PVg=\frac{27645}{0.07229008 -0.03}*\left [ 1-\frac{(1+0.03)^{8}}{(1+0.07229008 )^{8})} \right ]$

$PVg=653699.401846*0.275231=179918.34$

NPW of lease=179918.34*(1+0.07229008)=192924.65