Deferred Annuities - HP 12C Platinum Owner's Handbook Manual

132 Section 12: Real Estate and Lending
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Leases often call for periodic contractual adjustments of rental payments. For
example, a 2-year lease calls for monthly payments (at the beginning of the
month) of $500 per month for the first 6 months, $600 per month for the next 12
months, and $750 per month for the last 6 months. This situation illustrates what
is called a "step-up" lease. A "step-down" lease is similar, except that rental
payments are decreased periodically according to the lease contract. Lease
payments are made at the beginning of the period.
In the example cited, the rental payment stream for months 7 through 24 are
"deferred annuities," as they start at some time in the future. The cash flow
diagram from the investor's viewpoint looks like this:
To find today's present value of the cash flows assuming a desired yield, the NPV
technique may be used. (Refer to pages 59 thru 63.)
Example 2: A 2-year lease calls for monthly payments (at the beginning of the
month) of $500 per month for the first 6 months, $600 per month for the next 12
months, and $750 per month for the last 6 months. If you wish to earn 13.5%
annually on these cash flows, how much should you invest (what is the present
value of the lease)?
Display
Initialize.
0.00
First cash flow.
0.00
Second through ninth cash flows.
0.00
8.00
Tenth through thirteenth cash flows.
7,000.00
4.00
Interest.
6.00
15,218.35 NPV.