Question

You are a real estate owner in Bloomington Indiana and you have rented a house to students. You expect to make 6% per year on this leasehold investment. The terms of the lease are for 24 months and the rent is due at the beginning of the month. Your savvy renters are Kelley students and they request that the rent be paid, instead, at the end of the month. How much more will the investor receive as a result of payments at the beginning of the month rather than the student's proposed payments at the end of the month over the entire life of the lease? The monthly rent payment is $2800.

a. $1800

b. $162.67

c. $2108.46

d. $315.88

e. $1408.49

Answer 1

	Montly rent payment	$                                                 2,800.00
	Period (months)	24
	Required rate of return (p.a.)	6%
	Required rate of return (per month)	0.005
	Option 1 - Payment at beginning of month
	PV	=Monthly rent * (1+Present Value factor at 0.5% for 23 periods)
	PV	=2800*(1+21.6757)
	PV	=2800*(22.6757)
	PV (a)	$     63,491.91
	Option 2 - Payment at end of month (proposed by student)
	PV	=Monthly rent * Present Value factor at 0.5% for 24 periods
	PV	=2800*22.5629
	PV (b)	$     63,176.03
	More amount the investor will receive as a result of payments at the beginning of the month rather than the student's proposed payments at the end of the month over the entire life of the lease (a-b)	$     315.88	[63491.91-63176.03]
	Correct Answer is d. $315.88