Final answer:
The problem involves finding the monthly payment for a lease option that has a different payment structure but results in the same present value as a constant-payment lease option, accounting for a 9% annual discount rate (0.75% monthly). Using the present value of an annuity formula, one can calculate the monthly payment that makes the company indifferent between the two leasing options.
Step-by-step explanation:
A student is considering two alternative 5-year leases for a property and seeks to identify at what monthly lease payment for the second lease option they would be indifferent compared to the first lease. The first lease option costs $2,000 per month for 60 months.
The second lease offers no rent for the first 12 months, followed by equal monthly payments for the remaining 48 months. With a weighted average cost of capital (WACC) of 9%, or monthly discounting at 0.75%, the student aims to calculate the lease payment for the second option that would yield an equivalent present value to the first lease.
To solve this, we can use the present value (PV) of an annuity calculation. The first lease has a straightforward PV calculation since it's a flat rate of $2,000 per month. The second lease's PV needs to account for the zero payments during the first year and then solve for the monthly payments that equal the PV of the first lease.