1. Linda Peddler owns a bicycle factory. She could either rent or buy a machine to increase her factorys production capacity. She can rent the machine for its expected life of 10 years for 120 payments of $1,000, due at the end of each month. The appropriate annual discount rate for the payments is 6.40%. At what price should Ms. Peddler be indifferent between renting and purchasing the machine?
2. How does your answer to item a change if the annual discount rate moves to 5.43%?
3. The DLW Group signs a commercial lease for office space. Under the terms of the lease, DLW will pay $10,000 in rent at the beginning of each month for five years. The proper annual discount rate for this stream of payments is 8.98%. What is the present value of DLWs obligation under the lease?
4. How does your answer to item c. change if the annual interest rate changes to 10.25%?