Time-Value-of-Money and Amortization Worksheets 33
Answer: The present value of the cash flows is $23,171.23, which exceeds
the machine’s cost by $171.23. This is a profitable investment.
Note: Although variable cash flow payments are not equal (unlike
annuity payments), you can solve for the present value by treating the
cash flows as a series of compound interest payments.
The present value of variable cash flows is the value of cash flows
occurring at the end of each payment period discounted back to the
beginning of the first cash flow period (time zero).
Example: Computing Present Value of a Lease
With Residual Value
The Peach Bright Company wants to purchase a machine currently leased
from your company. You offer to sell it for the present value of the lease
discounted at an annual interest rate of 22% compounded monthly. The
machine has a residual value of $6500 with 46 monthly payments of
$1200 remaining on the lease. If the payments are due at the beginning
of each month, how much should you charge for the machine?
Compute present value of 4th
cash flow.
% .
PV=
6,830.13
Sum to memory. D H
1
6,830.13
Recall total present value. J 1
23,171.23
Subtract original cost. B 23000 N 171.23
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