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ABC manager Mathew has negotiated a lease agreement with BB Management. Included in the agreement is an option?

ABC manager Mathew has negotiated a lease agreement with BB Management. Included in the agreement is an option to pay $55,000 upon signing the lease to pay for the cost of configuring the office to meet the needs of ABC or to pay nothing up front, but to incur an annual lease in the amount of $16,000 at the end of each year for the four-year term of the lease. (10 marks) Assuming ABC has a cost of capital of 10 percent, which option should Mathew choose?

Public Comments

1. If ABC company pays it all up front, the present value of that cost is $55,000. If they pay $16,00 at the end of each of the 4 years of the lease at a 10% capital cost, we use the present value (PV) of an ordinary annuity factor from a compound interest table which is 3.169865. Multiply that times the $16,000 equals a PV of $50,718. Therefore the installment method is cheaper for the company.