Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payments if the opportunity cost of funds is 14 percent.

The present value of the lease payments if the opportunity cost of funds is 14 percent is:$3,226,367.

Based on the information given we would make use of financial calculator to find the present value (PV) by using this formula

PV=(Rate;NPER;PMT;FV;type)

Where:

Future value=$0

Present value=?

Rate of interest = 14%

NPER =12 years

PMT =$500,000

Hence:

Present value=$3,226,367

Inconclusion the present value of the lease payments if the opportunity cost of funds is 14 percent is:$3,226,367.

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$3,226,366.51

Explanation:

We use the present value formula so that the approximate value could come. It is shown in the attachment below:

Given that,  

Future value = $0

Rate of interest = 14%

NPER = 12 years

PMT = $500,000

The formula is shown below:

= PV(Rate;NPER;PMT;FV;type)

So, after solving this, the present value is $3,226,366.51

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