Blinko Products is considering elating an airplane for use by its sales staff. I fate airplane is leased, the company would make an immediate deposit of $40,000 to cover any damage during use. The lease would run for five years, at the end of which time the deposit would be refunded. The lease would require an annual payment of $100,000 (the first payment is due at the end of Year 1). At the end of the five-year period, the plane would revert back to the manufacturer. Blinko uses a discount rate of 10%. What is the net present value of leasing the airplane?
| Net present value is calculated as present value of cash inflow less present value of cash outflow | ||||
| Present value | 1/(1+R^t) | |||
| Interest rate is R and time period is t | ||||
| Calculation of present value of leasing airplane is given below | ||||
| Year | Cash flow | Discount factor @ 10% | Present value | |
| 0 | -$40,000 | 1.00000 | -$40,000.00 | |
| 1 | -$100,000 | 0.90909 | -$90,909.09 | |
| 2 | -$100,000 | 0.82645 | -$82,644.63 | |
| 3 | -$100,000 | 0.75131 | -$75,131.48 | |
| 4 | -$100,000 | 0.68301 | -$68,301.35 | |
| 5 | -$60,000 | 0.62092 | -$37,255.28 | |
| (-100000+40000) | ||||
| Net present value | -$394,241.82 | |||
| Thus, net present value of leasing is -$394,241.82 | ||||
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