QUESTION:

MNO Inc. has a lease for a property with an annual rental payment of $120,000. The lease term is 10 years and the company uses a discount rate of 8%. Calculate the present value of the lease payments.

Solution:

PV of lease payments = $120,000 x [(1 - (1 + 8%)^-10) / 8%] = $866,570.82

Here are the tabulated working calculations for the PV of lease payments:

To calculate the present value of the lease payments, we use the formula for the present value of an annuity, which is:

PV = PMT x [(1 - (1 + r)^-n) / r]

where PV is the present value of the annuity, PMT is the amount of the annuity payment, r is the interest rate, and n is the number of periods.

In this case, the PMT is $120,000, the interest rate is 8%, and the number of periods is 10 years. Substituting these values into the formula, we get:

PV = $120,000 x [(1 - (1 + 8%)^-10) / 8%]

Simplifying the equation, we get:

PV = $120,000 x [(1 - 0.46319354) / 0.08]

PV = $120,000 x [8.0398507]

PV = $966,782.48

To calculate the PV of lease payments in Microsoft Excel, you can use the PV function. Here are the steps:

1. Open a new Excel worksheet.
2. In cell A1, enter "PMT" (without quotes).
3. In cell A2, enter "Rate" (without quotes).
4. In cell A3, enter "Nper" (without quotes).
5. In cell A4, enter "PV" (without quotes).
6. In cell B1, enter the amount of the annuity payment, which is $120,000.
7. In cell B2, enter the interest rate, which is 8%.
8. In cell B3, enter the number of periods, which is 10.
9. In cell B4, enter the following formula to calculate the present value of the lease payments:

=PV(B2,B3,-B1,0,0)

The PV function takes five arguments: the rate, the number of periods, the payment amount (which is negative in this case), the future value (which is 0 in this case), and the type (which is also 0 in this case).

1. Press Enter to calculate the PV of lease payments.

The result should be $866,570.82, which is the same as the manual calculation we did earlier.