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Indifference point: variable rent or fixed rent 5 yr lease

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Assume you have a restaurant in operation and the property owner has offered a 5-year lease rental of $42,000 per year or a variable lease rental of 10% of your sales revenue. Your current sales revenue in the new year is projected to be 505,000. Find the indifference point (the break even point of sales revenue at which the fixed rent and variable rent for a year are the same). Explain which alternative you would accept.

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Solution Summary

See analysis in Excel showing how I computed the "indifference" point and the conclusion.

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I would accept the fixed rent unless I thought sales would fall ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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