You will pay $1,000 in annual rent to your landlord on a 20 year lease. Your fir

Question

You will pay $1,000 in annual rent to your landlord on a 20 year lease. Your first               
payment will be made today January 1, 2013 and each succeeding payment will be               
made on the first day of the year for the next 20 years. You use a rate of 8%.               
What is the present value of these payments?               
(Hint: this is an annuity due)               
If you could buy this property right now for $12,000 and assume it would last               
you 20 years would you buy it now?               

Explanation / Answer

present value of this payments = 1000 +1000/1.08 +1000/1.08^2 +-------+1000/1.08^19

=$9090.877

As we have to give $12000 for this property to buy but as present value is only $9090.877. we should not buy this project

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