Question

Present value of an ordinary annuity and annuity due. (Show your work)

Jill Morris is presently leasing a small business computer from Eller Office Equipment Company. The lease requires 10 annual payments of $6,000 at the end of each year and provides the lessor (Eller) with an 8% return on its investment. You may use the following 8% interest factors:

                                                                                             9 Periods       10 Periods     11 Periods

Future Value of 1                                                                   1.99900           2.15892          2.33164

Present Value of 1                                                                   .50025             .46319            .42888

Future Value of Ordinary Annuity of 1                                12.48756         14.48656        16.64549

Present Value of Ordinary Annuity of 1                                6.24689           6.71008          7.13896

Present Value of an Annuity Due of 1                                   6.74664           7.24689          7.71008

Instructions

(a)   Assuming the computer has a ten-year life and will have no salvage value at the expiration of the lease, what was the original cost of the computer to Eller?

(b)   What amount would each payment be if the ten annual payments are to be made at the beginning of each period?

Answer 1