Answer:
The completely stated question and the multiple-choice answers include:
Latting Corporation has entered into a 7-year lease for a building it will use as a warehouse. The annual payment under the lease will be $4,781. The first payment will be at the end of the current year and all subsequent payments will be made at year-end. If the discount rate is 6%, the present value of the lease payments is closest to:
A. $31,573
B. $22,257
C. $33,467
D. $26,688
The correct answer is: $26,688 (D)
Explanation:
First of all, we have to calculate the Present Value Interest Factor of an Annuity (PVIFA), which is the factor that can be used to calculate a series of annuities. The formula for PVIFA is given by:
[tex]PVIFA = \frac{1-(1+r)^{-n} }{r}[/tex]
where:
r = interest rate per period
n = number of periods.
There are also existing PVIFA tables for already calculated PVIFA at different interest rates per period, and at a periodic interest (discount) rate of 6% for 7 years, the PVIFA = 5.5824
Therefore the Present value is calculated thus:
Annual payments × PVIFA for 7 years at 6%
4,781 × 5.5824 (refer to the PVIFA table)
= 26,689.45 (closest to 26,688)
