Red Sun Rising Corp. has just signed a lease for its new manufacturing facility. The lease agreement calls for annual payments of $1,600,000 for 20 years with the first payment due today. If the interest rate is 3.45 percent, what is the value of this liability today

The present value of the liability today is $23,631,155.52

Explanation:

The lease payments form an annuity due as the lease payments meet the criteria of the annuity due. The lease pays equal amount of payments, after equal intervals of time and for a definite period of times. Besides, the payments made are at the start of the period. Thus, it is an annuity due.

The formula to calculate the present value of an annuity due is attached and using this formula we can calculate the present value of the lease liability today.

PV = 1600000 + 1600000 * [ (1 - (1+0.0345)^-19) / 0.0345 ]

PV = $23,631,155.52

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