Question

Williams Warehousing currently has a warehouse lease that calls for five annual payments of $120,000. The warehouse owner, who needs cash, is offering Williams a deal wherein Williams will pay $200,000 this year and then pay only $80,000 each of the remaining 4 years. (Assume that all lease payments are made at the beginning of the year.) Should Williams Warehousing accept the offer if its required rate of return is 9%, and why? A. No, there is an additional $80,000 payment in this year. B. Yes, there is a savings of $45,494 in present value terms. C. Yes, there is a savings of $49,589 in present value terms.

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Answer 1

		9.00%
		NPV@ 0.09
Year	Cash flow	PV factor	PV-Cash flow
0	120,000.00	1.000	120,000.00
1	120,000.00	0.917	110,091.74
2	120,000.00	0.842	101,001.60
3	120,000.00	0.772	92,662.02
4	120,000.00	0.708	85,011.03
		PV of lease payments	508,766.39
		9.00%
		NPV@ 0.09
Year	Cash flow	PV factor	PV-Cash flow
0	200,000.00	1.000	200,000.00
1	80,000.00	0.917	73,394.50
2	80,000.00	0.842	67,334.40
3	80,000.00	0.772	61,774.68
4	80,000.00	0.708	56,674.02
		PV of lease payments	459,177.59
PV of lease payment saving			49,588.80
So offer should be accepted, option C is correct