Question

Choosing between Rent Payment Alternatives Park City Construction is building a new office building, and management is trying to decide how rent payments for the office space should be structured. The alternatives are as follows: Plan A Annual payment of $15,000 at the end of each year. Plan B Monthly payments of $1,200 at the end of each month. Assuming an interest rate of 12% compounded monthly, which payment schedule should Park City use? Round your answers to the nearest dollar. (Click here to access the FV and PV tables to use with this problem.)

Answer 1

Alternative A:

Present value of annual rent payment =PVF 12%,1*Annual payment

        = 0.89286*15000

           = $ 13392.9

Alternative 2:

monthly rate= 12/12= 1%

Number of months =12

Present value of monthly payment =PVA 1%,12*A

       = 11.25508* 1200

         = $ 13506.10

since the present cost of alternative B(renting on monthly basis is higher than on annual basis),Alternative A should be selected .