Question

You leased retail space 7 years ago for $17,500 per month, payable at the beginning of each month. Your lease is for 20 years and allows you to sublease the space. You have decided to move your business to another location and sublease to Thai Pagoda Palace for $8,500 at the beginning of each month for the remainder of the lease. What is the value of your position (referred to as a leasehold interest), assuming that money is worth 6.7% compounded monthly?

Answer 1

The value of the leasehold interest is $402,942.88.

Step-by-step explanation:

To calculate the value of your leasehold interest, we need to find the present value of the remaining lease payments. The formula for present value is: PV = PMT * [(1 - (1+r)^-n)/r], where PV is the present value, PMT is the monthly payment, r is the interest rate per period, and n is the number of periods. In this case, the PMT is $8,500, r is the monthly interest rate (6.7% divided by 12), and n is the number of months remaining in the lease (20 years minus 7 years). Plugging in these values into the formula, we can calculate the present value of the lease payments.

PV = $8,500 * [(1 - (1+0.067/12)^(-12*(20-7)))/(0.067/12)]

Solving this equation gives us a present value of approximately $402,942.88. Therefore, the value of your leasehold interest is $402,942.88.