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Leases often call for periodic contractual adjustments of rental payments. For
example, a 2-year lease calls for monthly payments (at the beginning of the month)
of $500 per month for the first 6 months, $600 per month for the next 12 months,
and $750 per month for the last 6 months. This situation illustrates what is called a
"step-up" lease. A "step-down" lease is similar, except that rental payments are
decreased periodically according to the lease contract. Lease payments are made
at the beginning of the period.
In the example cited, the rental payment stream for months 7 through 24 are
"deferred annuities," as they start at some time in the future. The cash flow
diagram from the investor's viewpoint looks like this:
To find today's present value of the cash flows assuming a desired yield, the
technique may be used. (Refer to pages 58 thru 62.)
Example 2: A 2-year lease calls for monthly payments (at the beginning of the
Example 2:
Example 2:
Example 2:
month) of $500 per month for the first 6 months, $600 per month for the next 12
months, and $750 per month for the last 6 months. If you wish to earn 13.5%
annually on these cash flows, how much should you invest (what is the present
value of the lease) ?
Keystrokes
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500gJ
gK
5ga
600gK
12ga
750gK
6ga
13.5gC
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Section 12: Real Estate and Lending
Section 12:
Real Estate and Lending
Section 12:
Section 12:
Real Estate and Lending
Real Estate and Lending
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0.00
Initialize.
500.00
First cash flow.
500.00
Second thru sixth cash flows.
5.00
600.00
Next twelve cash flows.
12.00
750.00
Last six cash flows.
6.00
1.13
Monthly interest rate.
12,831.75
Amount to invest to achieve a
13.5% yield.
135
135
135
135
NPV
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