On January 1, year 1, Homeland Entity (HE) signed a 20-year lease contract for a
ID: 2335856 • Letter: O
Question
On January 1, year 1, Homeland Entity (HE) signed a 20-year lease contract for an office building. The lease contract calls for HE to make payments of $10,000 at the beginning of each year, with the first payment being made January 1, year 1. This lease qualifies as a financing lease. HE decides to use the present value technique to estimate the fair value of the leased office building. The appropriate interest rate to reflect the time value of money is 8%. What is the fair value of the leased building?
Explanation / Answer
Year Annual Lease Payments PVIF@8% Present Value of Lease Payments 1 10000 1 10000.00 2 10000 0.92592593 9259.26 3 10000 0.85733882 8573.39 4 10000 0.79383224 7938.32 5 10000 0.73502985 7350.30 6 10000 0.6805832 6805.83 7 10000 0.63016963 6301.70 8 10000 0.5834904 5834.90 9 10000 0.54026888 5402.69 10 10000 0.50024897 5002.49 11 10000 0.46319349 4631.93 12 10000 0.42888286 4288.83 13 10000 0.39711376 3971.14 14 10000 0.36769792 3676.98 15 10000 0.34046104 3404.61 16 10000 0.3152417 3152.42 17 10000 0.29189047 2918.90 18 10000 0.27026895 2702.69 19 10000 0.25024903 2502.49 20 10000 0.23171206 2317.12 Total 200000 106035.99 The fair value of Leased Building is 106035.99