Pinnacle Industrial Group is evaluating a sale-leaseback arrangement with Industrial Capital Partners. The lease requires Pinnacle to make semi-annual payments of $187,500 at the beginning of each period for 8 years (16 payments total). Using a semi-annual discount rate of 4.125% (reflecting Pinnacle's weighted average cost of capital adjusted for lease risk), calculate the present value of Pinnacle's lease obligation as it would appear on the balance sheet under current accounting standards.
Correct Answers
present_value
$2,254,093.96
Step-by-Step Solution
Present Value of Annuity (annuity due): Payment (PMT): $187,500.00 Rate per period (r): 4.1250% Periods (n): 16 PVA (ordinary) = PMT × [1 − (1+r)^−n] ÷ r PVA = $187,500.00 × [1 − (1+4.1250%)^−16] ÷ 4.1250% PV Factor = 11.545579 PVA (ordinary) = $2,164,796.12 Annuity due: PVA × (1+r) = $2,164,796.12 × 1.041250 = $2,254,093.96