In Problem 8 we assumed identical lease rates for old and new desks.

a. How does the initial break-even lease rate change if the expected inflation rate is 5% per year? Assume that the real cost of capital does not change. ( Hint: Look at the discussion of equivalent annual costs in Chapter 6.)

b. How does your answer to part

(a) change if wear and tear force Acme to cut lease rates by 10% in real terms for every year of a desk’s age?

AppendixLO1