Exercise 5 The city of Bluegrass NY gave the McEnroe Tennis

Exercise 5 The city of Bluegrass, NY gave the McEnroe Tennis Club a 25-year lease to use a 10-acre arroyo park for its facilities. The club will pay $150,000 now and $25,000 per year to the city; additionally, the club will make significant improvements to the park facilities. The club is planning to open its tennis courts to the public from 7:00 AM to 2:00 PM Tuesday through Friday, and from 6:00 AM to 1:00 PM Saturday and Sunday (Monday will be closed). If the club makes $150,000 worth of improvements now and then $75,000 worth each year for the next 5 years, what is the equivalent annual cost of the lease to McEnroe Tennis Club at an interest rate of 10% per year?

Solution

Find the equivalent annual cost for the cash flow series as

AEC = (150,000 + 150,000)(A/P, 10%, 25) + 75000(P/A, 10%, 5)(A/P, 10%, 25) + 25,000

= 300,000*0.11017 + 75,000*3.79079*0.11017 + 25,000

= $89373.35