MHB Calculate Present Value of 10-Year Lease w/ OCC & Variable Rental

AI Thread Summary
The discussion revolves around calculating the present value of a 10-year lease with annual payments that increase by 2% each year, starting at £20, with an opportunity cost of capital (OCC) of 10%. The original poster initially calculated a present value of -£23.88, while the book states it should be £132.51. Participants suggest that the error likely stems from incorrect data entry into the calculator. A corrected formula is provided, emphasizing the importance of accurate input for the calculation. The conversation concludes with the poster confirming the use of the correct figures resolved the issue.
logicandtruth
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Hi all

Trying to improve my level of maths and would like some help with the below question please.

A 10-year lease with annual rental payments to be made at the end of each year, with the rent increasing by 2% each year. If the first year rent is £20 and the OCC is 10% per year, what is the Present value of the lease?

The formula for present value of a level annuities is below (for a growing interest rate)

View attachment 8227

According to my book the answer should be £132.51, but I get -23.88.

View attachment 8228

Could anyone tell me where I am misinterpreting the formula?
 

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Mathematics news on Phys.org
Book is correct. Are you using a calculator?
You're probably entering the data wrongly...we can't tell...
Try it this way:
u = (1.02/1.10)^10
v = .10 - .02

PV = 20*(1 - u) / v
 
Yes it works I must have been using the incorrect figure with my calculator.

Many thanks
 

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