Below is a question, that I had some trouble with last night. Let me know what you get for this question. Williams Warehousing currently has a warehouse lease that calls for five annual payments of $120,000. The warehouse owner, who needs cash, is offering Williams a deal wherein Williams will pay $200,000 this year and then pay only $80,000 each of the remaining 4 years. (Assume that all lease payments are made at the beginning of the year.) Should Williams Warehousing accept the offer if its required rate of return is 9%, and why? A) Yes, there is a savings of $49,589 in present value terms. B) Yes, there is a savings of $45,494 in present value terms. C) Yes, there is a savings of $80,000 over the five years. D) No, there is an additional $80,000 payment in this year. Something doesnt seem right here. I did all the steps the solution asked. Yes I used BGN. I got 129986 for first 200k. But the 80,000PMTs just cannot add up to ~459 including the 129986. Thx.
Nevermind I was doing this backwards. GOT IT!
Is A the answer ? I did it in excel : =120000+NPV(0.09,120000,120000,120000,120000) --> $508,766.39 =200000+NPV(0.09,80000,80000,80000,80000) --> $459,177.59 Savings = $508,766.39 - $459,177.59 =$49,588.80
Yep…getting same answers as charu_mulye answer is A
A it is. I did it backwards.