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the 1 in the formula represents the rent payment on 1 Jan 2015, which is on the inception date of lease (1st payment) as the rent payment is made in advance (start of each year in the 5 years lease period), there is no timing difference (both on 1 Jan 2015) thus no need to discount the 1st payment; the annuity factor discounts the 2nd to 5th rent payment in the lease to be paid in advance (start of 2nd to 5th year); if the question setting change to rent being paid at end of each year, then there will be timing difference and annuity factor should change
your calculation is only discount factor for payment in beginning year 5, to get the AF, you need to add all years discount factor except for the 1st payment in 1 Jan 2015, namely (1+0.05)^1+(1+0.05)^2+(1+0.05)^3+(1+0.05)^4
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@19:10
The interest payment of 887 is not a cash flow right? Only the 5000 i believe to be a cash flow.
Correct?
Yes thats right, only 5000 is the actual cashflow
Thank you so much this was helpful
Why did you add 1 to the PVFA(r,n) before multiplying with the lease payments?
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the 1 in the formula represents the rent payment on 1 Jan 2015, which is on the inception date of lease (1st payment) as the rent payment is made in advance (start of each year in the 5 years lease period), there is no timing difference (both on 1 Jan 2015) thus no need to discount the 1st payment; the annuity factor discounts the 2nd to 5th rent payment in the lease to be paid in advance (start of 2nd to 5th year); if the question setting change to rent being paid at end of each year, then there will be timing difference and annuity factor should change
Why am I getting an AF of 1.21 when the calculation is =(1+0.05)^4.
your calculation is only discount factor for payment in beginning year 5, to get the AF, you need to add all years discount factor except for the 1st payment in 1 Jan 2015, namely (1+0.05)^1+(1+0.05)^2+(1+0.05)^3+(1+0.05)^4
can you explain how u got 3.546
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He told you that he made the payment already in the first year how are you re deducting 5000 from the 22730 ?