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? (Hint: The cost of capital per month is 11%/12 = 0.9166667%.)
A) $2,810.09
B) $3,243.24
C) $3,803.06
D) $4,299.87
E) $4,681.76

Question

Quizplus · Accepted Answer

The present value of the current lease and the new lease must be calculated using the cost of capital per month. The difference between these present values will give the change in Sally's net worth.

After Getting Her Degree in Marketing and Working for 5