Early in the year 2005, the owner of a building made a lessee an offer. The...

 

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Early in the year 2005, the owner of a building made a lessee an offer. The lease contract has four more years to run, and the rent is to be increased by 10% a year each year over the preceding year. The rent is payable in equal monthly installments but (for the sake of simplicity) assume it is all paid at year-end. The building owner's offer is that a lump sum payment now (early in January 2005 before the January rent check had been prepared) of $80,000 would be considered as prepaid rent for the remaining four years of the contract. If the offer is accepted, Charlie would borrow $80,000 from the bank. The arrangement with the bank is that $20,000 of the principal will be repaid on December 31, of the years 2005 through 2008, with interest at 12% on the amount owed at the beginning of each year. Use the interest rate as the discount rate. The tax rate is 22%. Assume that in 2004 the rent payment was $24,000. Should the offer be accepted? Early in the year 2005, the owner of a building made a lessee an offer. The lease contract has four more years to run, and the rent is to be increased by 10% a year each year over the preceding year. The rent is payable in equal monthly installments but (for the sake of simplicity) assume it is all paid at year-end. The building owner's offer is that a lump sum payment now (early in January 2005 before the January rent check had been prepared) of $80,000 would be considered as prepaid rent for the remaining four years of the contract. If the offer is accepted, Charlie would borrow $80,000 from the bank. The arrangement with the bank is that $20,000 of the principal will be repaid on December 31, of the years 2005 through 2008, with interest at 12% on the amount owed at the beginning of each year. Use the interest rate as the discount rate. The tax rate is 22%. Assume that in 2004 the rent payment was $24,000. Should the offer be accepted?

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