Question

In: Economics

You're a contractor who needs to lease space for a field office during the five years...

You're a contractor who needs to lease space for a field office during the five years of a construction project. The owner of the building where you want to rent space offers you three lease options. Each option assumes payment at the beginning of each year, and i=4% per year. which option would you chose?

A) First year annual rent of $12,000, with an increase of $2,500 per year for each of the next four years

B) First year annual rent of $12,000, with an increase of 18% per year for each of the next four years

C) Constant rent of $16,900 per year for five years.

*please solve arithmetically and not with excel*

Solutions

Expert Solution

A) The present value of the first lease option = $ 12,0001.041 +  $ 14,5001.042 + $ 17,0001.043 + $ 19,5001.044

The present value of the first lease option =  $56,726.15

_________________________________________________________________

B) The present value of the second lease option = $ 12,0001.041 +  $ 14,1601.042 + $ 16,708.801.043 + $ 19,716.381.044

The present value of the second lease option = $ 56,337.89

____________________________________________________________________

C) The present value of third lease option = $ 16,9001.041 +  $ 16,9001.042 + $ 16,9001.043 + $ 16,9001.044  + $ 16,9001.045

The present value of third lease option = $ 75,235.80

_______________________________________________________________________

The owner should choose the second lease option because it is the cheapest lease option compared to the first and third lease option.

Rahul Sunny answered 2 years ago
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