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Forums › FIA Forums › MA2 Managing Costs and Finance Forums › Discounted cash flow topic ,help required
Q:X company takes on a five year lease of a building for which it pays $27,200 as a lump sum payment.X company then sub-lets the building for five years at a fixed annual rent,with the rent payable annually in arrears.
What is the annual rental charge,if the rent is set at a level that will earn a DCF yield of 17% for X company?
Cumulative discount factor at 17% years 1-4=2.743
Cumulative discount factor at 17% years 1-5=3.199
A)$5,440
B)$8,502
C)$9,916
D)$87,013
According to kaplan the right answer is B but i don,t know how they reached that answer ?
IRR = 17% (given)
27200 = Rent x 3.199 [Zero NPV @IRR, by definition]
Rent = 27200/3.199 = 8,502