You own a building that a local business wants to rent for t

You own a building that a local business wants to rent for the next 10 years. The business owner has offered to pay $40,000 today or pay $6,400 at the end of each of next 10 years. If your required rate of return is 10%, which payment schedule should you accept?

Solution

Lets calcualte the PV of the $6400 for the 10 years. Enter the following in the financial calculator

PMT = 6400; n=10; 1/y = 10%, FV = 0; calculate PV = $39,325.23

Since this is less than $40,000, we should accept the full payment ($40,000) today as opposed to $6400 at the end of next 10 years.