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ACCA Applied Skills · Financial Management · Specific investment decisions (lease or buy, asset replacement, capital rationing)

Omega Co is offered a lease requiring four annual payments of $30,000, the first payable immediately at the start of the lease. Tax is ignored. The discount rate is 10%. The 3-year annuity factor is 2.487 and the 4-year factor is 3.170. What is the present value of the lease payments?

The present value is $104,610. With the first payment made immediately, the four payments fall at times 0 to 3, so the factor is 1 plus the 3-year annuity factor of 2.487, which is 3.487. Multiplying by $30,000 gives $104,610.

  1. A$95,100
  2. B$104,610Correct
  3. C$120,000
  4. D$125,100

Explanation

Payments are at times 0, 1, 2 and 3, so the factor is 1 + 2.487 = 3.487. PV = $30,000 × 3.487 = $104,610. $95,100 treats payments as in arrears. $125,100 adds 1 to the 4-year factor, giving five payments. $120,000 is undiscounted.

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