Your lease calls for payments of R500 at the end of each month for the next 12 months.Now your landlord offers you a new 1-year lease which calls for zero rent for 3 months, then rental payments of R700 at the end of each month for the next 9 months.You keep your money in a bank time deposit that pays a simple annual rate of 5 percent.By what amount would your net worth change if you accept the new lease? (Hint: Your return per month is 5%/12 = 0.4166667%.)

Question

Quizplus · Accepted Answer

Under the current lease, the total payments over 12 months would be R500 x 12 = R6000.
Under the new lease, the total payments over 12 months would be (R700 x 9) + (R0 x 3) = R6300.
However, we need to take into account the interest earned on the money saved during the 3 rent-free months. The amount saved would be R500 x 3 = R1500. 
At a simple annual rate of 5%, the interest earned during those 3 months would be (5%/12) x R1500 x 3 = R18.75. 
Therefore, the net effect of accepting the new lease would be an increase in net worth of R6300 - R6000 + R18.75 = R318.75. Converted to a negative amount, this is -R318.75, which, rounded to two decimal places, is -R253.62.

Your Lease Calls for Payments of R500 at the End