Question

Alexander Enterprises leases property to Hamilton, Inc. Because Hamilton is experiencing financial difficulty, Alexander agrees to receive five rents of $20,000 at the end of each year, with the rents deferred 3 years. What is the present value of the five rents discounted at 12%?

Short answer

The present value of five rents received is $51,316.2.

Step-by-step solution

Definition of lease

A lease is defined as the contract outlining the terms under which a party agrees to rent an asset such as property or machine by another party.

Computation of present value of five rents

$\begin{array}{c}\mathrm{Present}\mathrm{value}=\mathrm{Amount}\mathrm{of}\mathrm{five}\mathrm{rents}\times \mathrm{Present}\mathrm{value}\mathrm{of}\mathrm{ordinary}\mathrm{annuity}\mathrm{at}12\%\mathrm{for}8\mathrm{periods}\mathrm{deferred}3\mathrm{periods}\\ \mathbf{=}\mathbf{20},\mathbf{000}\mathbf{\times }\mathbf{2}\mathbf{.}\mathbf{56581}\\ \mathbf{=}\mathbf{\$}\mathbf{51},\mathbf{316}\mathbf{.}\mathbf{2}\end{array}$