Question

Tao Wang is considering leasing space for five years for his Chinese Buffet food establishment. He has three lease options as follows: 1. Fixed lease options: Pay $5,000 per month for sixty months beginning on the first day of the five-year lease. Pay $55,000 per year on the first day of each year for five years. 2. Mixed lease option: Pay $25,000 on the first day of each year and 3 percent of annual sales on the last day of each year for five years. The forecasted annual sales are $1,400,000 for the first year, and sales are expected to increase by 5 percent each year. Assume Tao’s cost of capital is 10 percent. Determine the annual cash rents under each option.

Answer 1

fixed lease option 5000 PER MONTH
rent paid	Month	Cumulative rent paid	interest
5000	1	5000	41.67
5000	2	10000	83.33
5000	3	15000	125.00
5000	4	20000	166.67
5000	5	25000	208.33
5000	6	30000	250.00
5000	7	35000	291.67
5000	8	40000	333.33
5000	9	45000	375.00
5000	10	50000	416.67
5000	11	55000	458.33
5000	12	60000	500.00
5000	13	65000	541.67
5000	14	70000	583.33
5000	15	75000	625.00
5000	16	80000	666.67
5000	17	85000	708.33
5000	18	90000	750.00
5000	19	95000	791.67
5000	20	100000	833.33
5000	21	105000	875.00
5000	22	110000	916.67
5000	23	115000	958.33
5000	24	120000	1,000.00
5000	25	125000	1,041.67
5000	26	130000	1,083.33
5000	27	135000	1,125.00
5000	28	140000	1,166.67
5000	29	145000	1,208.33
5000	30	150000	1,250.00
5000	31	155000	1,291.67
5000	32	160000	1,333.33
5000	33	165000	1,375.00
5000	34	170000	1,416.67
5000	35	175000	1,458.33
5000	36	180000	1,500.00
5000	37	185000	1,541.67
5000	38	190000	1,583.33
5000	39	195000	1,625.00
5000	40	200000	1,666.67
5000	41	205000	1,708.33
5000	42	210000	1,750.00
5000	43	215000	1,791.67
5000	44	220000	1,833.33
5000	45	225000	1,875.00
5000	46	230000	1,916.67
5000	47	235000	1,958.33
5000	48	240000	2,000.00
5000	49	245000	2,041.67
5000	50	250000	2,083.33
5000	51	255000	2,125.00
5000	52	260000	2,166.67
5000	53	265000	2,208.33
5000	54	270000	2,250.00
5000	55	275000	2,291.67
5000	56	280000	2,333.33
5000	57	285000	2,375.00
5000	58	290000	2,416.67
5000	59	295000	2,458.33
5000	60	300000	2,500.00
3,00,000.00			76,250.00
	Rent	3,00,000.00
	interest	76,250.00
	Total paid	3,76,250.00

55000 LEASE OPTION
rent paid	Cumulative rent paid	interest
55000	55000	5500
55000	110000	11000
55000	165000	16500
55000	220000	22000
55000	275000	27500
275000		82500
	Rent	275000
	interest	82500
	Total paid	357500

mixed
rent paid	Cumulative rent paid
25000	25000	2500
25000	50000	5000
25000	75000	7500
25000	100000	10000
25000	125000	12500
125000		37500
Sale
Sale	Sale %	amount
14,00,000.00	3%	42,000.00
14,70,000.00	3%	44,100.00
15,43,500.00	3%	46,305.00
16,20,675.00	3%	48,620.25
17,01,708.75	3%	51,051.26
		2,32,076.51
Rent	1,25,000.00
interest	37,500.00
Sale amount	2,32,076.51
Total	3,94,576.51