Reference no: EM132546602

Suppose you have signed a lease to rent a large four bedrooms house for 2 years. You have been offered two alternatives. The first alternative is, you could pay an upfront rent for 2 years of $52,000. The second alternative is, you have signed a lease to rent an apartment for two years. The lease requires you to make payments of $2500 per month, payable at the start of each month, for 24 months. The first rental payment is due immediately. Assume the interest rate is 15% p.a. convertible monthly. Calculate the present value of the rental cash flow and identify which of the alternative is cheaper. Based on your calculation which of the following statement is true.

(a) The PV of rental payments is $50,000, which is less than the first alternative by $2000; hence, the second alternative should be chosen as it is cheap.

(b) The PV of rental payments is $51,560.59, which is less than the first alternative by 439.41; hence, the second alternative should be chosen as it is cheap.

(c) * The PV of rental payments is $52,205.09, which is more than the first alternative by 205.09; hence, the first alternative should be chosen as it is cheap.

(d) The PV of rental payments is $55,205.09, which is more than the first alternative by $3205.09; hence, the first alternative should be chosen as it is cheap.

(e) The PV of rental payments is $52,605.09, which is more than the first alternative by $605.09; hence, the first alternative should be chosen as it is cheap.