City Consulting Services is considering moving into a new office building. The cost of a $1-$year lease

is $8,000,$ paid immediately. This cost will increase in future years at the annual inflation rate of $5\%.$

The firm believes that it will remain in the building for $4$ years. So it will have to pay rent at the

beginning of each year for $4$ years $($it will pay rent at t $=0,1,2$ and $3).$ The nominal interest rate is

$9\mathrm{.}2\%.$

a$.$ What is the real interest rate? Use the Fisher equation $($not the approximation$).$

b$.$ Calculate the present value of the rental costs by discounting the nominal cash flows at the nominal

discount rate.

c$.$ Calculate the present value of the rental costs by discounting the real cash flows at the real discount

rate. $($You should get exactly the same answer as in part b$.)$