Calculate the present values of the lease payments for both contracts.? You are

Question

Calculate the present values of the lease payments for both contracts.? You are currently thinking of leasing an apartment. The current lease rates quoted by the lessor on the lease contracts of $1000 is $18 per month and $12.50 per month for 3-year and 5-year terms respectively. While the monthly lease rentals on the 3-year contract are payable in arrears, those for the 5-year contract are payable in advance (Assuming 10 percent marginal cost of debt to the lessee) The answer is 561 and 599. which formula that I should use without using the finance table?

Explanation / Answer

Use annuity formula

PV = (Payment/i)(1-1/(1+i)n)

where i = cost of debt = 10% per year = 10/12 = 0.8% per month

n = number of months

for 3-year contract (start paying at the end of first month)

PV = (18/0.008)(1-1/1.00836) = $561

for 5-year contract (start paying at the beginning of first month)

PV = 12.5 + (12.5/0.008)(1-1/1.00859) = $599

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