Spinning Wheels Co. is considering renting a new bike shop. The landlord has offered a number of alternatives for paying the rent. The company's desired rate of return is 10%. The landlord offered a 3-year lease with the rent payments as follows: $8,000 at the end of the first year, $12,000 at the end of the second year, and $14,000 at the end of the third year. Using a spreadsheet or financial calculator, calculate the present value of the rent payments over the life of the lease.

Question

Business

Melina Mills

26 February, 21:33

Spinning Wheels Co. is considering renting a new bike shop. The landlord has offered a number of alternatives for paying the rent. The company's desired rate of return is 10%. The landlord offered a 3-year lease with the rent payments as follows: $8,000 at the end of the first year, $12,000 at the end of the second year, and $14,000 at the end of the third year. Using a spreadsheet or financial calculator, calculate the present value of the rent payments over the life of the lease.

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Answers (1)

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Allyson Massey · Answer 1

The present value of the rent payments over the life of the lease is $27,708

Explanation:

Year 1: $8,000

Year 2: $12,000

Year 3: $14,000

Rate of return: 10%

Option 1:

The present value of the rent payments over the life of the lease can be calculated in excel in the formula of NPV

= NPV (Rate, Cash in year 1, cash in year 2, cash in year 3) = NPV (10%,8000,12000,14000) = $27,708

Option 2:

NPV of cash in Year 1 after 3 years = $8,000 / (1+10%) ^1 = $7,273

NPV of cash in Year 2 after 2 years = $12,000 / (1+10%) ^2 = $9,917

NPV of cash in Year 3 after 1 years = $14,000 / (1+10%) ^3 = $10,518

So total NPV of cash in 3 years = $7,273 + $9,917+$10,518

= $27,708