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You have a lease that will cost you $8,000 next year, increasing at 3% a year...

You have a lease that will cost you $8,000 next year, increasing at 3% a year (the forecasted inflation rate) for 3 additional years (4 years total). If discount rates are 10% what is the present value cost of the lease?

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Answer #1

Lease cost for year 1 = $8,000

Lease cost for year 2 = $8,000*(1 + 0.03) = $8,240

Lease cost for year 3 = $8,000*(1 + 0.03) ^ 2 = $8,487.20

Lease cost for year 4 = $8,000*(1 + 0.03) ^ 3 = $8,741.82

Present value of cost of lease = Lease cost for year 1 / (1 + 0.10) +  Lease cost for year 2 / (1 + 0.10) ^2 +  Lease cost for year 3 / (1 + 0.10) ^ 3 +  Lease cost for year 4 / (1 + 0.10) ^ 4

= $ 8,000 / 1.1 + $8,240 / (1.1) ^2 + $8,487.20 / (1.1) ^3 + $8,741.82 / (1.1) ^ 4

= $7,272.73 + $6,809.92 + $6,376.56 + $ 5,970.78

= $ 26,429.99

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