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The owner of a development site is considering an offer from a parking lot operator to...

The owner of a development site is considering an offer from a parking lot operator to rent the parcel for the next five years, while the development is being planned and approved. The operator has offered to pay $65,000 today or an annuity of $20,000 at the end of each of the next 5 years. Which payment method should the site owner accept if her required rate of return is 15 percent?

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Expert Solution

We have to compute the present value of both the option and accept the one which is higher
Option 1 65,000 today
Present value = 65000
Option 2 annuity of $20,000 at the end of each of the next 5 years
year Cash flow PVIF @ 15% prenset value
1 20000          0.8696 17,391.30
2 20000          0.7561 15,122.87
3 20000          0.6575 13,150.32
4 20000          0.5718 11,435.06
5 20000          0.4972     9,943.53
67,043.10
present value =     67,043.10
since present value in option 2 is higher therefore we should accept the "annuity of $20,000 at the end of each of the next 5 years" Payment method.

jeff jeffy answered 2 weeks ago
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