After getting her degree in marketing and working for 5 years for a large department store, Sally started her own specialty shop in a regional mall. Sally's current lease calls for payments of $1,000 at the end of each month for the next 60 months. Now the landlord offers Sally a new 5-year lease which calls for zero rent for 6 months, then rental payments of $1,050 at the end of each month for the next 54 months. Sally's cost of capital is 11 percent. By what absolute dollar amount would accepting the new lease change Sally's theoretical net worth?
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A. B. C. D. E.B
CF(0) = 0 -
CF(1-6) = 0 -
CF(7-60) = 1,050 -
I = 11/12 = 0.9167 -
Solve for NPV = -$42,189.97. Therefore, the PV of payments under the proposed lease would be less than the PV of payments under the old lease by $45,993.03
- $42,189.97 = $3,803.06. Sally should accept the new lease because it would raise her theoretical net worth by $3,803.06.