15.8 - Olga Counterman's motel and restaurant rents its...

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Olga Counterman's motel and restaurant rents its facilities from Z-B corporation. Olga has been paying 10% of the motel and restaurant's total sales to Z-B. This past year the sales breakdown was as follows: Rooms $4,500,000 Food 800000 Telephone 50000 Miscellaneous 50000 Total $5,400,000 Z-B Corporation has made two proposals to Olga regarding a new 5-year lease contract: -Proposal A: Fixed rent of $60000 per month, due at the beginning of each month. -Proposal B: Variable rent-due at the end of each year-as follows: 12% of room sales:3% Olga expects total sales to increase by 20% each year over the next 5 years, and the sale Her firm's discount rate is 12%. Question. Identify which proposal Olga should choose and explain why. Year Rooms Food Telephone Miscellaneous 1 $5,400,000 $960,000 $60,000 $60,000 2 6,480,000 1,152,000 72,000 72,000 3 7,776,000 1,382,400 86,400 86,400 4 9,331,200 1,658,880 103,680 103,680 5 11,197,440 1,990,656 124,416 124,416 Option A payments Month Payment
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This homework help was uploaded on 03/25/2008 for the course HB 482 taught by Professor Schmidgall during the Spring '08 term at Michigan State University.

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15.8 - Olga Counterman's motel and restaurant rents its...

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