TVM 15 - Present Value of an Annuity Due
Amazon Inc. rents a warehouse for five years with annual rent payments of $2.5 million made at the beginning of each year. If the interest rate is 8.6%, what is the present value of the rental obligations? Since the rent payments are made at the beginning of the year, this is a present value of an annuity due problem.
First we input the data into the relevant cells.
The payment, PMT, is -$2,500,000.
The Type is Type 1 since the payment is at the beginning of the year.
NPER, number of periods, is 5. The rate is 8.6%.
We go to the Formulas tab. We look for the PV function.
We click on Rate.
We click on NPER.
We click on payment, PMT.
And we click Type.
We hit OK and the PV is $10,670,924.