you have just agreed to rent a villa in *** for the next 4 years. Rent for the villa is fixed at AED 211080 at the start of each year. If you want, you can make one payment of AED 761891 now to cover the rent for all 4 years.
If the opportunity cost of money is 7% compounded annually, how much will you save by paying the rent in one payment now?
the correct answer is: 3127.09
how to get it??? ><
2007-08-27 10:56:02 · 1 answers · asked by Yuuji 1 in Science & Mathematics ➔ Mathematics
The present value of the first year's rent is 211080, because that money is already here now.
The present value of next years rent is 211080/1.07 = 197271.03; this represents how much you would have to invest to have next year's rent.
The present value of the rent two years from now is 211080/(1.07^2); the same progression holds true for the third year's rent.
What you have is this: 211080(1 + 1/1.07 + 1/1.07^2 + 1/1.07^3) = 765020.63. You would need to invest this much money right now to pay the rent for those years.
765020.63 - 761891 = 3129.63....a small error from what you found.
Conclusion: it is more cost effective to pay in advance, if possible.
2007-08-27 11:16:38 · answer #1 · answered by Mathsorcerer 7 · 0⤊ 0⤋