Answer:
I believe that this problem is about determining the equivalent annual cost of leasing option A:
lease cost year 1 = $36.25/sf
lease cost year 1 = $37.25/sf
lease cost year 1 = $38.25/sf
lease cost year 1 = $39.25/sf
lease cost year 1 = $40.25/sf
there are two ways to calculate this solution and the answer will vary significantly depending on which assumption you take:
a) lease payments are paid at the beginning of the year
the PV = $36.25 + $37.25/1.06 + $38.25/1.06² + $39.25/1.06³ +$40.25/1.06⁴ = $170.27
equivalent annual cost = ($170.27 x 6%) / [1 − (1 + 6%)⁻⁵
] = $10.2162 / 0.2527 = $40.42/sf
b) lease payments are paid at the end of the year
the PV = $36.25/1.06 + $37.25/1.06² + $38.25/1.06³ + $39.25/1.06⁴ +$40.25/1.06⁵ = $160.63
equivalent annual cost = ($160.63 x 6%) / [1 − (1 + 6%)⁻⁵
] = $9.6378 / 0.2527 = $38.13/sf
