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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% of food sales: 2% of other sales

Olga expects total sales to increase by 20% each year over the next 5 years, and the sales mix is expected to remain constant.
Her firm's discount rate is 12%.

Question.
Identify which proposal Olga should choose and explain why.

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Solution Summary

The expert examines Olga counterman's motel and restaurant rents. The expected total sales to increase are determined.

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Present Value= Cash Flow / (1+ interest rate)^ year

NPV = Sum of Present ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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