You’re a contractor who needs
You’re a contractor who needs to lease space for a field officeduring the five years of a construction project. The owner of thebuilding where you want to rent space offers you three leaseoptions. 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 $2,500per 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*
Answer:
A) The present value of the first lease option = $12,000
1.041+ $ 14,5001.042+ $ 17,0001.043+ $ 19,5001.044
The present value of the first lease option= $56,726.15
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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
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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
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The owner should choose the second lease option because it isthe cheapest lease option compared to the first and third leaseoption.
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