How to Calculate the Present Value of a Lease Obligation
What is the present value of a lease obligation with fixed payments for the first two years and a higher rate for the next three years?
Given that you have signed a new lease today to rent office space for five years with fixed lease payments of $4,500 per month for the first two years, and $5,500 per month for the next three years, what is the present value of this lease obligation if the appropriate discount rate is 8 percent?
The Present Value of the Lease Obligation
The present value of the lease obligation is $277,487.10.
Calculating the present value of a lease obligation with fixed payments for the first two years and a higher rate for the next three years involves determining the present value of the lease payments over the five-year period using a discount rate of 8%.
To find the present value, we need to sum up the present values of the lease payments for each period. This can be done by first calculating the present value of the payments for the first two years at $4,500 per month and then for years 3-5 at $5,500 per month, and finally adding them together.
For the first two years, the present value of payments can be calculated as follows:
PV1 = $4,500 * ((1 - (1 / (1 + 0.00667)^24)) / 0.00667) = $95,055.24
For years 3-5, the present value of payments can be calculated as follows:
PV2 = $5,500 * ((1 - (1 / (1 + 0.00667)^36)) / 0.00667) = $182,431.86
The total present value of the lease payments is the sum of PV1 and PV2:
PV = PV1 + PV2 = $95,055.24 + $182,431.86 = $277,487.10