Question

A firm wants to lease some land from you for 20 years and build a warehouse on it. As your payment for the lease, you will own the warehouse at the end of the 20 years, estimated to be worth $20,000 at that time. a. If i = 8%, then what is the PW of the deal to you? b. If i = 2% per quarter, then what is the PW of the deal to you?

Answer 1

(a)

Worth of the warehouse at the end of 20 years = $20,000

Interest rate = 8%

Time period = 20 years

Calculate the Present Worth -

PW = Worth of the warehouse at the end of 20 years (P/F, i, n)

PW = $20,000 (P/F, 8%, 20)

PW = $20,000 * 0.2145 = $4,290

At the interest rate of 8%, the PW of the deal is $4,290.

(b)

Worth of the warehouse at the end of 20 years = $20,000

Interest rate = 2%

Time period = 20 years

Calculate the Present Worth -

PW = Worth of the warehouse at the end of 20 years (P/F, i, n)

PW = $20,000 (P/F, 2%, 20)

PW = $20,000 * 0.6730 = $13,460

At the interest rate of 2%, the PW of the deal is $13,460.