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 required rate of return is 11 percent.By what absolute dollar amount would accepting the new lease change Sally's theoretical net worth? (Hint: The required rate of return 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 is calculated using the formula for the present value of an annuity. The present value of the new lease is calculated similarly, accounting for the 6-month rent-free period. The difference between these two present values gives the change in Sally's theoretical net worth. The correct calculation results in an absolute dollar amount of $3,803.06.

After Getting Her Degree in Marketing and Working for 5