Question

Sally in a local mall currently has a lease that calls for payments of $1,000 at the end of each of the next months. The landlord had offered a new 5 year lease that calls for zero rent for 6 months, then Rental payments of $1,050 at the end of each month for the next 54 months. Sally cost of capital is 11% should Sally’s accept the new lease ? Please explain your rationle?

Answer 1

Hello

I'm going to solve this using excel. if you want solution in any other way, please let me know.

Option 1
Amount	Time	Present Value Annuity Factor	Present Value	Formula Used
1000	1-60	45.99303	45993.03	=E6*G6

I computed present value factors for all payments for period 1 to 60 with rate (11/12)% and then summed them all to come to the figure of 45.99303.

Option 2
Amount	Time	Present Value Annuity Factor	Present Value	Formula Used
1050	1-54	42.44214	44564.247	=E6*G6

I computed present value factors for all payments for period 1 to 54 with rate (11/12)% and then summed them all to come to the figure of 42.44214.

Present Value at Time, t=6	Present Value at time,t=0	Formula Used
44564.25	42189.97	=E9/((1+(11/12)%)^6)

Hence, Sally should accept the new lease as it would give a net benfit of $3,803.06($45,993.03 - $42,189.97)

I hope this clears your doubt.

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