Reginal is about to lease an apartment for the year. The landlord wants him to m

Question

Reginal is about to lease an apartment for the year. The landlord wants him to make the lease payments at the start of the month. The twelve monthly payments are $1,300 per month. The landlord says he will allow Reg to prepay the rent for the entire year with a discount. The one-time annual payment due at the beginning of the lease is $14,778. What is the implied monthly discount rate for the rent? If Reg is earning 1.5% on his savings monthly, should he pay by month or make the single annual payment?

Explanation / Answer

we will use the PV of annuity due formula

PV of annuity due = (1+r) * P * (1 - (1+r)^(-n))/r

where r is montly interest rate

P is annity payment

n is number of month

we need to find the value of r

14778 = 1300 * (1+r) * (1 - (1+r)^(-12))/r

while solving this equation we will get the value of r = 1%

so the monthly discount rate = 1% per month.

If reg is earning 1.5% on his saving monthly then he should pay by month rather than single annual payment because he can generate more interest on saving account because rate is more than implied monthly dicsount rate.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.